Credit Suisse links callable yield notes to indexes; risky structure may limit retail interest, adviser says

By Kenneth Lim

Boston, Oct. 30 - Credit Suisse's planned callable yield notes linked to three stock indexes is a complex product that may see limited interest from retail investors, an investment adviser said.

"It's pretty complicated and it's pretty risky," the adviser said.

Credit Suisse, acting through its Nassau Branch, plans to price 18.5% callable yield notes due Nov. 27, 2009 linked to the S&P 500, Russell 2000 and Dow Jones Euro Stoxx 50 indexes.

The notes will pay interest quarterly unless called by the issuer.

If any of the underlying indexes closes at 60% or below of its initial level during the life of the notes and any of the indexes finishes below its initial level, investors at maturity will lose 1% of their principal for every 1% that the worst performing index declines below its initial level. Otherwise investors will receive par at maturity.

Highly risky structure

The notes appear to be quite risky, the investment adviser said.

"There's no principal protection and your payout is linked to the worst performing index," the adviser said. "So it doesn't matter if two of the indices do really well. Your return at the end of the day is linked to the worst performer. So you need all three of them to do well."

The product will reward increases in all three indexes, the adviser said.

"This is a very clear bullish product," the adviser said. "The knock-in gives you a bit of a barrier so that if the worst index goes down by a little, less than 40%, you still get back your principal. But if the knock-in is triggered, you have nothing to worry about as long as the index goes back up."

But the adviser said the structure could make it tough for investors to get back their principal once the knock-in is triggered.

"If the index has fallen 40%, what you need is for it to increase by 66% from that point to get back to the starting point," the adviser said. "So it's unlikely you'll get back your principal once the knock-in is triggered."

Retail interest limited

The adviser said some retail investors may shy away from the product because of its risky structure, the adviser said.

"I don't think the risk appetite is there," the adviser said. "People are squirreling away their cash. If you want them to spend some of that, something so risky isn't the way to do that."

The adviser acknowledged that the product had a generous coupon and a low knock-in level, but said the potential payouts matched the risks.

"You're getting those terms because there's more risk, simple as that," the adviser said.

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