Credit Suisse’s accelerated barrier notes on index basket offer global diversification

By Emma Trincal

New York, June 18 – Credit Suisse AG, London Branch’s 0% accelerated barrier notes due July 7, 2025 linked to an equally weighted basket of indexes including the Euro Stoxx 50 index, the MSCI Emerging Markets index and the S&P 500 index offer a “plain-vanilla” leveraged structure with exposure to a diversified equity basket, sources said.

If the basket finishes at or above its initial level, the payout at maturity will be par plus 135% of the basket return, according to an FWP filing with the Securities and Exchange Commission.

If the basket falls by up to 30%, the payout will be par.

Otherwise, investors will be fully exposed to the basket decline.

More leverage

“That’s a real diversified basket. You’ve got almost everything: the U.S., Europe and emerging markets,” said Steve Doucette, financial adviser at Proctor Financial.

“But it’s only 135% the upside. I would want more leverage.

“Going five years out you should be able to get more than 135%.

“It’s a diversified basket so it should be less volatile. That means your options for the leverage should be cheaper.”

The uncapped upside was to be expected, he noted.

“It’s pretty standard. There shouldn’t be a cap when you’re locking your money up for five years,” he said.

Doucette said he purchased a note with a 285% upside participation and a 60% barrier. To be fair, he said, the note was not tied to a diversified basket but to the worst of two international equity indexes. In addition, the product had a 50% cap over a three-and-a-half-year length.

“That’s the thing, it was a worst-of. So, I may not get 285% or 300% but would start to negotiate at 150%,” he said.

Barrier

Doucette said he was “fine” with the barrier.

“Five years out, I’m not so much worried about the 70% barrier. It’s reasonable. We always try to capture at least 40% though... that’s even more than the worst case of bear market scenario,” he said.

Low barriers make sense right now.

“We’re back to market highs, and you never know. This bull could run for another two years and crash.

“Still I’m comfortable with 70% five years out,” he said.

One way to increase the upside leverage could be to lower the amount of contingent protection.

“I might look at 80%, but again, I’d have to see,” Doucette said.

Best-of is best

Ideally, Doucette prefers buying best-of baskets, which, he said are much better for investors than a diversified basket.

Best-of payouts work as follows: the underlying comprise two or three baskets each of which consisting of equally weighted indexes. Typically, the baskets correspond to a region or sector. At maturity investors are exposed to an allocated return calculated from a predefined formula giving the highest weight to the best-performing basket, a lower weight to the second best-performing basket and the lowest percentage allocation to the worst one.

Investors will get at maturity par plus the allocated return. The structure sometimes offers a downside buffer but not often.

The cost of the call options used to structure those best-of notes is expensive, which eliminates the possibility of leverage most of the time. As a result, the return enhancement of those products derives essentially from the enhanced reallocation of the baskets, not the leverage.

“I would have to work on this note to get more leverage. If you give me a best-of, I don’t really care about the leverage so much. It’s a neat alternative. You get the best allocation. We like those best-of a lot,” he said.

Global exposure

Matt Medeiros, president and chief executive of the Institute for Wealth Management, looked at the product favorably.

“It’s the type of note you can easily use as a core holding in a portfolio,” he said.

“In the uncertain environment we’re in right now, these are the types of structures clients are looking for, and that’s because they offer peace of mind.

“Having the downside protection, and in that case a bit of an enhancement to the return, is appealing,” he said.

Medeiros said he also liked the composition of the basket.

“In theory you could almost say that the S&P is a global diversified fund because of the constituents of the S&P, which are large companies operating all over the word. It’s inherently diversified globally.

“Adding Europe and the emerging markets essentially makes it an overweight global basket.

“But it makes sense in relation to historic valuations for each of those indexes.

“The S&P is at a high valuation level. The two others – the emerging markets and the Euro Stoxx – are undervalued and have been for some time.

“I like this note,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes will price on June 30.

The Cusip number is 22552WA39.

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