Credit Suisse's knock-out notes linked to MSCI EAFE offer decent trade-off, adviser says

By Emma Trincal

New York, Aug. 14 - Credit Suisse AG's 0% capped knock-out notes due Sept. 4, 2014 linked to the MSCI EAFE index give investors leveraged exposure to the developed countries equity index with a barrier, but the trade-off is a cap, which can be seen as an acceptable trade-off or a limitation depending on the level of bullishness of the investor, sources said.

A knock-out event occurs if the final index level is less than the initial level by more than the knock-out buffer amount, which is expected to be 10% and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If a knock-out event has not occurred, the payout at maturity will be par plus double any index gain, subject to a maximum return that is expected to be 16%. If the index falls by up to 10%, the payout will be par. The exact upside leverage factor and cap will be set at pricing.

If a knock-out event has occurred, investors will be fully exposed to the index's decline from its initial level.

Upside risk

A market participant said that the main risk, in his view, was on the upside.

"It seems simple enough. It's a one-year term. It's tied to the developed markets benchmark, with Europe heavily weighted in this index, and that's fine. European equity is what the market is doing right now," he said.

"The EAFE pays a decent dividend, so you're giving that up."

The dividend yield on the EAFE index is 2.8%.

"I guess it all depends on how you feel about this market. If the EAFE index was up 8% after a year, you do 2X, it's great. You get your cap," he said.

"But in reality, this market can do 10% or 12%, so you may be leaving money off the table.

"Issuers are trying to entice clients with 2X because it seems attractive.

"But sometimes, investors are better off with a 1.5 times up and a larger cap.

"When markets move, they move pretty well. If you had done this deal on the S&P, look how much you would've left on the table this year."

The S&P 500 is up 18% this year, which on a two-times leveraged basis would have yielded 36%.

While most investors "won't get upset" if they make 16% in one year, he said, everything depends on how much the index will rally.

"If you make 16% instead of 30%, that's when you're not going to be a happy camper. When the market runs through that cap, that's the risk the investor is taking."

Not a bad trade-off

For investors looking to invest in the developed countries outside of the United States and Canada, the structure of the notes present an acceptable proposition, a financial adviser said.

"It's one of these things ... for someone who wants exposure to this market, it seems like an OK way to get it," this adviser said.

"I'd much rather have a buffer than a barrier, but I can't really comment on the pricing because I haven't done this index in a while.

"Of course, you are capped at 16%, and you could be missing up on the upside. There is always that risk of giving that up. But it's probably not the only exposure that an investor would get from that area. So I wouldn't want to be greedy."

This adviser pointed to the benefits of the trade-off.

"For giving up anything above 16%, you get something in return. If it's up any amount, you're doubling that, and you get that barrier," he said.

"There is the fact that this index pays more in dividends. It's an issue but not a huge issue.

"If you want exposure to this index, I'd say it's not a bad way to get it."

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

The notes are expected to price Friday and settle Aug. 21.

The Cusip number is 22547Q7K6.

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