Credit Suisse’s $500,000 CS notes on Netflix, Tesla, Oracle offer 95% protection via worst-of

By Emma Trincal

New York, Feb. 28 – Credit Suisse AG, Nassau Branch’s $500,000 of 0% CS notes due March 4, 2019 linked to the common stocks of Netflix, Inc., Oracle Corp. and Tesla, Inc. caught the attention of some market participants: the structure offers nearly full downside protection in a worst-of format.

The payout at maturity will be par plus any gain of the least performing stock, according to a 424B2 filing with the Securities and Exchange.

If any stock finishes below its initial level, the payout will be 95.15% of par.

Investors cannot lose more than 4.85%, which justifies the categorization of the product as principal-protected note or PPN, a market participant said.

Maximum loss

“They’re called maximum loss notes. We haven’t done any to my knowledge,” he said.

“They’re definitely compelling for conservative investors although not everyone likes the tax treatment,” he said.

Investors are required to recognize interest income during the term of the securities, according to the prospectus. As a result, they are subject to ordinary income tax treatment.

The unusual aspect of the deal was the use of a worst-of payout, he noted.

“Most PPNs are five to seven years and they’re typically done on one index. They were able to price this on a very short term paper because it’s the worst of three stocks.”

Portfolio

Some investors could be using the notes as a fixed-income substitute, he said, given the low market risk associated with the guaranteed repayment of 95.15% of par.

Alternatively, the notes may fit in a stock portfolio as a risk reduction tool.

“They were able to capture that much protection because they picked very volatile stocks, especially Tesla,” he said.

“I can see someone using it as a hedge in a U.S. equity portfolio. Tech had a big run up. You can reduce the risk of an existing exposure to the sector.”

Low correlation

A structurer said that that pricing was attractive due to the low correlation between the three individual stocks.

“Oracle and Netflix are very different. One is software the other, content. Tesla has a complicated business model in between automobile and technology,” he said.

But the high implied volatility of the stocks was another factor.

“Volatility has spiked in the market in general and these three stocks are moving fast. Everybody is watching their earnings,” he said.

“It’s the low correlation and high volatility that allowed the issuer to price the 95% protection on a one-year.”

Hard sale

Investors considering the notes may want to buy the dip.

“We just had a correction. If you’re looking at this deal you may be thinking that we’re due for a rebound. Those stocks may have good fundamentals and they’re likely to do well in the short term,” he said.

If principal-protection is rarely offered in a worst-of structure, there is a reason for that, he said.

“I think it’s a tough pitch. Nobody wants to be pegged to the worst-of on the upside,” he said.

“You usually don’t see PPNs with worst-of payoffs. The low correlation helps with pricing but it’s not a very good selling argument.

Worst-of deals tend to be popular in a low interest rates, low volatility environment.

“It’s your downside that’s pegged to the worst-of, not your gains. It works best when you need a structure to embed selling an option,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes (Cusip: 22550WEK9) priced on Feb. 20.

The fee is 0.5%.

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