Credit Suisse’s CS notes tied to CS Retiree Consumer Expenditure offer demographic play

By Emma Trincal

New York, Nov. 10 – Credit Suisse AG, Nassau Branch’s 0% CS notes due Nov. 28, 2023 linked to the CS Retiree Consumer Expenditure 5% Blended Index Excess Return offer attractive terms for investors seeking exposure to a long-term and specific strategy based on an age group’s consumption patterns, buysiders said.

The payout at maturity will be par plus 220% to 230% of any index gain with the exact upside participation rate to be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls or remains flat, the payout will be par.

“You have the principal protection. You’re not going to lose anything at maturity. They give you more than two times leverage and no cap. The structure is pretty neat if you believe in the theme,” said Steve Doucette, financial adviser at Proctor Financial.

65 and older

The underlying is a rules-based index that seeks to broadly mirror the overall consumer expenditure patterns of retirees in the United States. Using data from the Consumer Expenditure Survey (“CEX”) published by the U.S. Department of Labor’s Bureau of Labor Statistics, the index assigns category weights by computing the percentage that each of the 14 CEX consumer spending categories represents of the total consumer expenditure of the age group classified as “65 years and older” or “retirees,” according to the prospectus.

These weights are applied to a notional basket of seven equity indices intended to represent the CEX spending categories to construct the “base index.”

The base index is rebalanced each year to reflect the new annual survey.

In addition, the index targets an annualized realized volatility of 5%

Volatility

“The volatility target doesn’t really matter. You have nothing to lose since the downside is protected,” Doucette said.

However the lower volatility may dampen individual stocks’ performance, producing a muted return for the index, he said.

A table of hypothetical and historical performance included in a separate filing revealed an average annualized return of 4% from 2011 to 2015.

“The terms are OK, but we may be at the peak of the market right now,” he said.

Still, assuming a 4% annual return and a 225% upside participation rate, investors in the notes could end up with approximately 10% a year in return, he said.

Theme, tenor eyed

“This leverage and no-cap give you a huge potential for outperformance here if the theme plays out,” he added.

Doucette said he would have to do his “due diligence” in order to understand the rationale behind the strategy.

“I’m assuming the issuer is trying to sell something related to the demographics. You have to understand this index and believe in the strategy.

“You lock in your money out and hope you’d be rewarded handsomely.”

But the seven-year term was a concern, said Doucette, who believes a bear market is almost certain to hit within that timeframe.

“I would be hesitant though to lock money up for seven years. You could be up and down and up. Seven years is a long-term horizon,” he said.

Index a concern

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said that he liked the terms of the product.

“My first impression is I like the protection component. I like the fact that you get your money back at maturity,” he said.

But his concern was the index.

“I’m not familiar with it. I don’t know how to position this index,” he said.

“There is certainly a demographic opportunity with these types of stocks. Having an algorithm and a system to track that would be interesting to look at.”

The potential returns may not be high. But the leverage offset some of the low-volatility impact on performance.

“It seems to me that based on recent years’ performance, it behaves similar to a bond but should also have equity return characteristics thanks to the leverage,” he said.

Compared to more complex indexes, this one may offer a more accessible type of transparency.

“You can find the information on the DOL website and find the sectors. But I’m not sure you can easily understand what it is invested in,” he said.

“I like the terms. I just don’t know how to position the index because I’m not as familiar with it,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes (Cusip: 22548QN35) will price on Nov. 18 and settle on Nov. 28.

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