Credit Suisse’s Accelerated Return Equity notes linked to FTSE 100 are designed for true bulls

By Emma Trincal

New York, Feb. 27 – Credit Suisse AG’s 0% Accelerated Return Equity Securities due March 2, 2017 linked to the FTSE 100 index give investors who are bullish on the U.K. equity market an opportunity to maximize their return without any limitation, said Tim Vile, structured products analyst at Future Value Consultants.

The payout at maturity will be par plus at least 154% of any index gain. Investors will be exposed to any index decline, according to a 424B2 filing with the Securities and Exchange Commission.

Simple

“It’s a very simple product with no cap and no protection. The only optionality is in the leverage,” he said.

“This is a very attractive proposition for the right investor, which in the case would be someone quite bullish on the U.K. equity benchmark.”

Vile explained why the notes are mainly designed for the very bullish view.

“You first have to be very confident in the index to accept the full downside risk. If you’re wrong, you will begin to lose capital right away with no barrier or buffer to protect your investment,” he said.

“Having no cap is also a must when you’re very bullish.

“Finally, this trade requires conviction. The FTSE 100, as many other equity benchmarks, is now at all-time highs.

“Naturally, if you are that bullish, you have to be prepared to take on some risk.”

Market risk

Future Value Consultants assesses the risk associated with a product by adding two risk components: market risk and credit risk. The resulting riskmap measures risk on a scale of zero to 10 with 10 as the highest level of risk possible.

The market riskmap for this product is 3.49, compared with an average score of 2.93 for products of the same type, according to the research report. The product type is leveraged notes, which Future Value Consultants defines as any leveraged structure of any term and risk exposure.

“The market risk is much higher simply because all your capital is at risk immediately,” he said.

“The volatility is a factor, but other notes have more volatile underliers. The main driver here is in the structure itself, with the one-to-one downside.”

The risk is lower on the credit risk scale, the report showed, with a credit riskmap of 0.41 versus 0.54 for the average in this category.

“Two years is not too long, which helps the credit score. But you also have an issuer with good credit.”

Future Value Consultants measures the risk-adjusted return of each product with its return score. The score is calculated using five key market assumptions and choosing the best one. In this case, the bullish scenario is the optimal one used for the score computation.

The return score is 8.11 versus 7.63 for the average leveraged note.

The score is also higher than the average for all product types, at 7.32. The “all-products” category encompasses all notes recently rated by the research firm across all structure types.

“The no-cap helps greatly, especially combined with more than 1.5 times leverage. This is a risk-adjusted rating, so the score reflects the risk taken,” he said.

“This product is designed for investors who want most of the rise in the index in a relatively short period of time.”

Price, overall scores

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10. This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

The price score is 7.51 versus an average of 7.28 for the product category, according to the report.

“It priced relatively well. When compared to all products, it prices even better,” he said.

The average all-product-type price rating is 6.98.

“That’s because the duration is slightly longer than the broad category, which includes a great deal of review and reverse convertibles with kick-out, which automatically shorten the duration. Longer durations bring up the price score since we calculate the fees on an annualized basis.”

Future Value Consultants offers its general opinion on the quality of a deal with its overall score. This last rating is the average of the price score and the return score.

The overall score is 7.81, compared with a 7.45 average for the structure type and a 7.15 average for the all-products category.

“You have a high return score, an above-average price score. The product looks good,” he said.

“It’s an attractive investment for an aggressively bullish investor.”

The notes (Cusip: 22546V6B7) will settle on Wednesday.

Barclays is the placement agent.

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