Credit Suisse’s Bares tied to S&P 500 aimed at investors seeking modest, likely gains

By Emma Trincal

New York, March 2 – Credit Suisse AG, London Branch’s 0% Buffered Accelerated Return Equity Securities due Sept. 3, 2019 linked to the S&P 500 index offer an easy-to-achieve maximum return, but investors should have moderate expectations because the maximum return is not very bullish, said Suzi Hampson, structured products analyst at Future Value Consultants.

The payout at maturity will be par plus double any index gain, subject to a maximum payout of 10.5% to 12.5%, with the exact cap to be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and lose 1% for every 1% decline beyond 10%.

Comparisons

“This note offers a decent amount of leverage over a short period of time,” Hampson said.

“You have the leverage, the cap, the buffer... It’s a very standard, popular product.”

She drew a parallel between this deal and other structures.

“Compared to an autocallable, you can get a positive return below the cap. With the autocall you get the return or you don’t,” she said.

The degree of leverage however made the notes similar to a digital, she said.

“The higher the gearing – and two times isn’t bad – the more likely you are to reach the cap. In that way the structure is closer to a digital.”

Easy cap

Future Value Consultants generates stress test reports on structured notes. One of the tests, called “product specific table,” illustrated her point.

Investors have a 49.2% chance of getting the maximum return in a neutral market scenario, according to the table.

In a bullish scenario, the probability increases to 65%.

The research firm also offers back testing analysis for the past five, 10 and 15 years.

Over the last five years, the chances of getting capped are 81%. The probability decreases for the past 10 years to 66%.

“We can attribute those results to the bull market. When you compare the bull market simulation with the back testing for the past 10 years we get similar results and they’re both high,” she said.

Target return

“The notes are designed for investors who target a return they’re comfortable with, and who need to maximize the probabilities of getting it,” she said.

“If you were investing in it, it would be the return you would be looking to achieve.”

The cap, leverage and tenor provide investors with a 7.5% annualized compounded return. Investors get to the cap when the index is up 3.8% a year.

“It’s a very achievable goal. It’s a modest return but your probabilities of success are high,” she said.

“If you had a higher cap, the chances of getting it would be less.”

Equity substitute

Investors may consider the notes as an alternative to an exchange-traded fund although the two types of investments are very different, she noted.

“With the ETF you are long the index with no cap and no protection. Here, the leverage allows you to beat the index in certain circumstances, depending on the index performance. The 10% buffer does allow you to outperform as well,” she said.

Gains versus losses

Another table called “investor scorecard” shows the different outcomes of product performance with their probabilities of occurrence.

As seen previously the probability of reaching the cap is 49.20%. Getting a positive return below the cap level occurs 11.66% of the time. Meanwhile the probability to be protected by the buffer and to receive full principal at maturity is 15.32%. Losses will happen 23.82% of the time, according to the simulation.

“These figures show that three-quarters of the time, I won’t lose money,” she said.

The value of the buffer can be measured by the 15.32% probability associated with the full capital return bucket.

“It’s not bad. It shows that the buffer is doing what it’s supposed to do,” she noted.

Average payoff

The scorecard also provides specific information about average payoff for each outcome.

In a neutral market scenario, the average loss would be about 20%.

The back testing analysis for the last 10 years shows exactly the same average loss amount.

But going back over a more recent time frame, losses and average losses fall to zero over the last five years.

“The buffer and the bullish performance of the most recent years explain those results,” she said.

Rationale

In conclusion, Hampson said the structure was classic and simple.

“It’s not a very complicated product when you compare it with an autocall. You can look at an ETF as a comparable investment. The ETF does not cap the upside and therefore you can get paid more. But you don’t have a buffer that’s designed to reduce the chances and the size of your losses.

“You also don’t have the leverage, which makes your return target easier to achieve.

“This is simply a product for someone who is satisfied with the cap and happy to accept this return for the higher chance of getting it.”

Credit Suisse Securities (USA) LLC is the agent.

The notes (Cusip: 22550WBV8) will settle on Monday.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.