Credit Suisse’s $52.02 million leveraged notes on basket seen as bid on EAFE alternative

By Emma Trincal

New York, June 8 – Credit Suisse AG, London Branch’s $52.02 million of 0% Accelerated Return Notes due July 27, 2018 linked to a basket of indexes is the latest in a popular series of offerings designed to provide an alternative to a direct investment in the MSCI EAFE index, according to sources.

The MSCI EAFE index is the benchmark for the equity market performance of developed markets outside of the United States and Canada.

The basket components are the Euro Stoxx 50 index with a 40% weight, the FTSE 100 index with a 20% weight, the Nikkei stock average index with a 20% weight, the Swiss Market index with a 7.5% weight, the S&P/ASX 200 index with a 7.5% weight and the Hang Seng index with a 5% weight, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par of $10 plus triple any basket gain, up to a maximum return of 17.03%.

Investors will lose 1% for each 1% basket decline.

Popular trade

“That’s a big one! Somebody likes it,” said Steve Doucette, financial adviser at Proctor Financial.

The basket, which combines in varying weightings the equity benchmarks of the euro zone, the United Kingdom, Japan, Switzerland and Australia, has indeed been popular given its frequent use in past priced offerings as well as deal sizes.

A total of $540 million notes using baskets combining those five indexes have been issued so far this year in 56 offerings, according to data compiled by Prospect News.

In January of 2016, Goldman Sachs priced no less than $1 billion of notes linked to a basket consisting of the Euro Stoxx 50 index (58% weighting), the FTSE index (19%) and the Topix index (23%), according to the data.

This trade did not include all five countries but for the most part those deals do. The Credit Suisse notes offered the particularity of adding the Hong Kong stock market through the Hang Seng index, which has been done before but not often.

Bullish view

“From my perspective now is the time of being international,” said Doucette.

“That might just be the herd trade of the moment as the press has taken over and talks about it all the time. But from a valuation standpoint, it still makes sense,” said Doucette.

“If you’re optimistic – and with no protection you have to be optimistic, this one gives you a pretty good return. A 14% cap is not a bad cap.”

He was referring to 17% cap over 14 months, which on an annualized compounded basis is 14.5%.

Doucette noted that all equity markets in the basket are part of the “EFA,” the ticker for the iShares exchange-traded fund that replicates the performance of the MSCI EAFE index.

Weights

“It’s an EFA allocation plus,” he said.

“I like the flexibility in order to be comfortable with the underlying.”

The weightings have varied from deal to deal, which is one of the appeals of the notes, according to Doucette.

The order of importance by country however has remained constant with the FTSE 100 index first, followed by a Japanese index and next, Switzerland. Australia has the smallest allocation unless the Hang Seng is represented, in which case, it is last, according to a review of similar deals in the past by Prospect News.

In the ETF, Japan takes precedence over the United Kingdom with a 23% weighting versus 18% for the FTSE 100 index.

Switzerland, Australia and Hong Kong are also part of the index and are represented in the same order but with slightly different weightings than they are in the basket.

“The goal is to replicate EFA and change the allocations. I like the idea,” Doucette said.

One objection however was the 2% fee.

“If you buy and hold that’s fine. But if you want to get out early, say your basket is up 30%, the issuer is not going to let you get out without capturing all their fees and recouping their structuring costs.”

Risk

Brian Rettig, portfolio manager at the Institute for Wealth Management, was concerned about risk.

“I’m not crazy about it,” he said.

“We had a good run. The EFA is up more than 15% year to date already.

“At these levels you want to have some downside protection.

“I would prefer to have some buffer rather than lever up any remaining return we may or may not have in international equity or even take a straight shot at the ETF itself.”

The rationale for an investor in the product was to expect only modest returns, he noted.

With three-times leverage on the upside, the basket need only to rise less than 5% a year in order to enable investors to receive the maximum return.

“If you’re bullish there’s no reason to cap yourself at 17%. Some elections are coming up; we still have Brexit. If we chop around at those levels, that may be a good way to play it,” he said.

“Geopolitical headlines may dampen your bullishness.

“But regardless of the outlook, I would still need to have a buffer in there.”

BofA Merrill Lynch is the agent.

The notes (Cusip 22547V287) priced on May 25.

© 2015 Prospect News.
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