Credit Suisse's $51.45 million notes linked to index basket with local cap topped last week

By Emma Trincal

New York, Aug. 16 - Credit Suisse AG, Nassau Branch's $51.45 million of 0% notes due Aug. 28, 2013 linked to a weighted basket of three buffered return enhanced components turned out to be the best-selling offering last week. Sources pointed to the attractiveness of using local caps and buffers for better pricing.

J.P. Morgan Securities LLC and JPMorgan Chase Bank, NA were the placement agents.

The basket included the Euro Stoxx 50 index with a 55% weight, the Topix index with a 23% weight and the FTSE 100 index with a 22% weight, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus the basket return, which will be the sum of the weighted component returns of the basket indexes.

Local twist

The particularity of the deal is that both cap and buffer are applied to each component index individually instead of being based off the overall basket return.

"Using local caps is more exotic than capping at the basket level. The pricing depends a lot on the volatility of each component," a structurer said.

"Each individual cap is cheaper than capping the basket," a New York structurer added.

The composite return for a basket index is the product of the underlying return for that index multiplied by the return of that index's underlying currency relative to the dollar. The average composite return will be the average of the index's composite returns on the five trading days ending Aug. 23, 2013 minus one.

If an index's average composite return is greater than or equal to zero, its component return will be double the average composite return, subject to a maximum return of 19.2% for each index. If the index's average composite return is greater than or equal to negative 10% but less than zero, its component return will be zero. If the index's average composite return is less than negative 10%, its component return will be 1.1111 times the sum of the average composite return plus 10%.

Sources said that the 19.2% cap on a one-year term must have been one, if not the main factor driving the large bid.

"The cap ends up higher. That could be the attractiveness," an industry source said.

"If you cap on an individual basis, you reduce the options cost. It has to do with the levels of volatility for each component," an index analyst said.

A diversified basket is usually less volatile than its components taken individually, sources said. That's one of the reasons investors can get a higher cap at a local level.

"The investor is not necessarily better off. It will just price better if you do it independently," said the industry source.

"Given the volatility of one particular index, the cap would have come up different if you had done it by averaging the whole thing, while with this, you can get a higher cap on each piece," he said.

Market, currency risks

The performance of the basket will depend on the relative equity performance of the European Union, Japan and the United Kingdom, with a heavier weight on Europe, according to the composition of the basket.

Investors will also be subject to currency risk as each index is denominated in the local currency - the euro, the Japanese yen and the British pound sterling - before being converted into dollars.

As such, an appreciation in the dollar against any of the component currencies would hurt the performance of the basket, the prospectus warned.

A fund manager said that correlation risk is also a factor.

"It's a global beta bet," he said. "If the euro zone crashes, everything moves together.

"The bet is not about Europe, the U.K. and Japan. It's about do you want to be bullish or bearish?

"It's an unusually difficult time to have a view right now. You can ask me tomorrow, in one week or a year. But right now, I don't know. Nobody really knows."

The notes (Cusip: 22546TXS5) carried a 1% fee.

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