Credit Suisse’s knock-out notes tied to Euro Stoxx 50 index offer defensive exposure to Europe

By Emma Trincal

New York, Jan. 21 – Credit Suisse AG, London Branch’s 0% knock-out notes due July 25, 2017 linked to the Euro Stoxx 50 index are judiciously priced to give investors uncapped exposure to the index while limiting risk, advisers said.

The current global correction adds even more protection, they noted, especially for the euro zone equity benchmark, whose value has declined more than that of the S&P 500 index.

A knock-out event will occur if the final index level is less than the initial index level by more than the knock-out buffer, which is expected to be 26.7% and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If a knock-out event has not occurred and the final index level is greater than the initial level, the payout at maturity will be par plus the index return.

If a knock-out event has not occurred and the final index level is less than or equal to the initial level, the payout will be par.

If a knock-out event has occurred, investors will be fully exposed to the index’s decline.

Alternative

“For the adviser or individual who invests in index ETFs, why not move it over on a note like this?” said Steve Doucette, financial adviser at Proctor Financial.

“You get the same upside exposure, and you add a protection component.

“We already had a 10% decline in the Euro Stoxx year to date. Add to that the barrier and you’ve got a nice cushion.”

The exchange-traded fund that replicates the index was down 9.5% for the year on Thursday.

Bear market

Doucette said that for the past year or so U.S. investors have shown some interest in the Euro Stoxx 50, yet this benchmark has consistently underperformed the S&P 500.

“The argument was valuations. The S&P was going through the roof. But the Euro Stoxx has had a pretty wild ride. It has lost a lot,” he noted.

“From its peak in August, it’s already down 30%, which is a real bear.”

The index’s decline was steep during the financial crisis – it lost two-thirds of its value between December 2007 and March 2009 – and it has yet to recover from those pre-crisis levels, he noted.

The current level is still more than 50% lower than it was in December 2007. It remains below the most recent peak of June 2014 by nearly a third.

“My point is that current valuations are still pretty low. ... That should provide a layer of safety. If you add to that this 26% buffer, that’s a heck of a protection level,” he said.

“For these who invest in ETFs it adds a protection you cannot have with the index. I would say it’s a decent alternative to a long position.”

The notes provide a timely opportunity for investors who want exposure to the asset class as they see growth ahead while remaining cautious during the current market slump, another adviser said.

Pullback

Matt Medeiros, president and chief executive of the Institute for Wealth Management, also liked the 26.7% amount of contingent protection.

“With the recent pullback, generally speaking I would prefer a buffer. But because this note will price after the pullback, this barrier seems generous enough for this underlier,” he said.

“For the last 200 days going back to early August, the index is already off 20%. I’m fine with the 26% barrier level.”

Despite the recent entry of the Euro Stoxx 50 into bear market territory, Medeiros said he remains cautiously optimistic about European equities.

Opportunities

“I do like the Euro Stoxx over the next 18 months and even further out,” he said.

“It has dropped more than the S&P, and it makes sense because when there is more volatility in the market, people are running to stability. The S&P provides a little bit more stability.

“But at some point, you have to take a position.

“I believe that the Euro Stoxx provides some interesting valuations and opportunities in addition to an accomodative policy.”

He was alluding to the European Central Bank’s announcement on Thursday that it was willing to push further its stimulus effort starting in March. A year ago, the ECB launched a quantitative easing program.

“We think there is appreciation potential in Europe that is worth the risk. That’s why you have this note. It’s attractive to be able to pursue these opportunities with downside protection.

“This is the time you buy a note like this one.

“As Warren Buffet once said, ‘Only when the tide goes out do you discover who's been swimming naked.’

“This is a time when you’d better have your suit on.”

J.P. Morgan Securities LLC is the agent.

The notes (Cusip: 22546VUS3) are expected to price Friday and settle Wednesday.

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