Credit Suisse's planned notes offer alternative to buying overseas index funds, adviser says

By Kenneth Lim

Boston, Nov. 16 - A planned offering of accelerated return notes linked to a basket of international stock indexes and currencies is an alternative to directly buying stocks overseas, an investment adviser said.

Credit Suisse AG, Nassau Branch plans to price 0% notes due Dec. 7, 2011 linked to a basket of three buffered return enhanced indexes and their related currencies.

The basket comprises a 51% weighting of the Euro Stoxx 50 index and the euro, a 25% weighting of the FTSE 100 index and the pound sterling and a 24% weighting of the Topix index and the Japanese yen.

At maturity, investors will receive par plus the basket return.

The basket return will be the weighted sum of the component returns. The component return is double any gain in the product of the underlying index return and the performance of the underlying currency spot rate relative to the dollar, subject to a return cap. If the underlying return is between negative 10% and zero, the component return is zero. The component return decreases by 1.1111% for every 1% that the underlying drops by more than 10%.

The maximum return is 17.75% on the Euro Stoxx 50 component, 15.45% on the FTSE 100 component and 15.4% on the Topix component.

Pricing is expected on Friday.

Three-in-one package

Although the notes are sold as one product, they are essentially three separate investments packaged into one, the adviser said.

A more typical basket calculates the leveraged return based on the weighted average gross performance of the components, the adviser explained. In a more orthodox basket, if one component falls by more than the buffer, there is still a chance that another component that did not fall as much could offset the decline. But that is not the case in the Credit Suisse basket.

"It's interesting that they calculate the performance of each basket component and then combine them into the basket return rather than calculating the basket return as a whole," the adviser said. "You're still sort of averaging out the performance of each component, but this kind of imposes limits on the averaging."

The currencies and their respective indexes are also positively correlated, so investors could stand to make more from any gains in the indexes than just a simple dollar-denominated international equity index fund, the adviser added. But that means losses in any of the basket components could also hurt more.

"It's definitely more volatile than just a straightforward S&P 500 one-for-one kind of product," the adviser said.

International exposure

The notes could be attractive to investors who want leveraged participation in non-U.S. stocks over the next year, the adviser said.

"What I would say is it's a lot like going to London and putting some money in an index fund, going to Tokyo and so on," the adviser said. "The biggest difference is you don't actually have to go through all of that. You can just buy one product like this and you get a two-times gearing on the upside and a bit of downside protection and then you cash in after one year."

But investors need to be comfortable with the weighting of the basket, the adviser added.

"If you're going to be buying a bunch of international equity index funds, is this how you would allocate your funds in your portfolio?" the adviser said. "Obviously if you would rather be more allocated in Tokyo versus Europe, for instance, this might not suit your investment outlook or investment plan."

Investors should also be confident about Credit Suisse's credit strength and be willing to let the investment be locked away for a year. In terms of returns, investors could also lose on the upside if the indexes and currencies grow beyond the return cap.

"You look at what you can get out of this, then you look at the risks and the costs and you figure out if you're willing to pay that price for that kind of return," the adviser said.

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