Advisers seek more leverage in Credit Suisse’s $17.21 million basket linked notes

By Emma Trincal

New York, July 27 – Credit Suisse AG, London Branch’s $17.21 million of 0% leveraged buffered notes due July 12, 2024 linked to a weighted basket of indexes offer a notably high cap, but more leverage would be welcome, sources said.

The basket consists of the Euro Stoxx 50 index with a 36% weight, the Topix index with a 26% weight, the FTSE 100 index with a 17% weight, the Swiss Market index with an 12% weight and the S&P/ASX 200 index with a 9% weight, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 1.8 times the basket gain, up with a maximum payout of par plus 86.22%.

Investors will receive par if the basket finishes flat or falls by up to 15% and will lose 1.1765% for every 1% decline beyond 15%.

Very bullish

“It’s attractive. Getting some protection on the downside and diversification through a basket are good things especially with international indices, which could face headwinds in the near future,” said a market participant.

The basket components mimic the constituents of the MSCI EAFE index, which tracks the performance of developed markets excluding North America.

“The notes fit well into a portfolio. It’s your allocation to developed markets,” he said.

“I support the notes conceptually. But the 86% cap is high. I’m not sure it’s in line with my return expectations for this asset class.”

Too high

If the notes were to hit the cap, investors would receive about 36.5% in annualized compounded return. This would be the equivalent of the basket posting an annual gain of nearly 22%.

“I don’t think you’re going to exceed that cap. The 86% level is eye-catching but it’s not much of a factor,” he said.

“Conceptually you could get there. But it’s unlikely. Europe and other developed markets are going to face too many issues in the next couple of years.”

“The leverage is pretty good although personally I would seek more of it,” he said.

Make it 3x

A financial adviser agreed.

“I’d like to have more leverage and a lower cap. If this basket is up 10% in two years, you only get 18%. And in order to get to the 86% cap, you need the market to rise 48% in two years.

“That is very unlikely. The Euro Stoxx has been flat for some time.”

The Euro Stoxx 50 index underperformed the S&P 500 index last year by 14 percentage points. The year before, the euro zone benchmark posted a 5.5% return compared to 18% for the S&P 500.

“I’d much rather have 3x leverage with a lower cap or even better, a digital. Digitals work best when performance is flattish. If this basket goes up 5%, you get a digital coupon that’s hopefully much higher,” he said.

Ideally, this adviser would want to see triple upside exposure up to a 60% cap for the period.

While the possibility of achieving the 86% maximum return should not be ruled out, many obstacles made the use of leverage more adapted to a neutral to moderately bullish view, such as his, rather than the elevated cap, he explained.

Headwinds

“Central banks are raising rates. It’s not just the Fed. Europe is tightening too,” he said.

The European Central Bank raised rates by 50 basis points last Thursday, its first hike in more than a decade. At its meeting the same day, the Bank of Japan kept its rates unchanged. But the Bank of England is expected to hike interest rates next week as it faces an inflation rate close to 10%.

“There are a number is issues going on in Europe right now, from Ukraine to a looming debt crisis in Italy,” he added.

“I would give up a big chunk of the cap for more leverage because it’s my belief that returns are going to be muted.”

On the other hand, this adviser was comfortable with the buffer size.

“A twenty-four month’s forecast is impossible. We couldn’t forecast the pandemic before it hit us. At least this 15% buffer provides some protection, and I’m totally fine with the gearing,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes will settle on Thursday.

The Cusip number is 22553QD87.

The fee is 0%.

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