Credit Suisse's autocallables on iShares Silver ETF: attractive call premium, risky timing

By Emma Trincal

New York, Oct. 19 - Credit Suisse AG, Nassau Branch's autocallable notes linked to the iShares Silver trust, a silver exchange-traded fund, offer the potential of an attractive rate of return over a short period of time, sources said.

But the rising risk of a correction in the price of silver may not be adequately offset by the partial downside protection embedded in the structure, sources said.

Credit Suisse priced $825,000 of 0% autocallable notes due April 19, 2011 linked to the ETF, according to a 424B2 filing with the Securities and Exchange Commission.

The underlying asset is designed to provide investors with a means to invest in silver and seeks to mirror as closely as possible the price of silver bullion, before fees and expenses.

If the closing level of the trust is at or above its initial level on any of the observation dates, the notes will be called at par plus a call premium of 4.625% if called on Jan. 13, 2011 and a premium of 9.25% if called on April 14, 2011. On an annualized basis, the call premium is the equivalent of an 18.5% gain.

Attractive terms, underlying

The terms of the notes and the underlying theme may be appropriate for diversification purposes or for investors who continue to be bullish on silver, a financial adviser said.

"It makes some sense to invest in precious metals because of the falling dollar," said Frederick Wright, partner and chief investment officer at Smith & Howard Wealth Management.

"If you are fairly bullish or even mildly bullish, you might consider it. And I like that you have some downside protection."

Since its most recent low in October 2008, the price of the iShares Silver trust has almost tripled and is up nearly 40% in the year to date.

100% at risk

But Wright said that despite the attractive terms, the notes may not be appropriate for risk-adverse investors.

If the notes are not called and the trust remains at or above 80% of the initial level during the life of the notes, the payout at maturity will be par. Otherwise, investors will receive par plus the fund return, with exposure to any losses and a cap of par.

"If your priority is to be conservative, to protect your capital, then I don't like it as much. It all depends on what your goals are," he said.

The prospectus warned that investors can in theory lose their entire investment, a point that he said was a concern for him, stressing the distinction between the protection offered by the notes and a buffer.

"You can lose your entire principal wherein a 20% buffer protects 20% of your investment, leaving 80% of your capital at risk. That's the difference. I like to have a buffer. This one is a protection that goes away once you hit the trigger," he said.

The fact that the notes have a six-month tenor "helps a lot" though, Wright noted.

But the short-term duration may not be enough to mitigate the downside risk in a conservative investor's portfolio, he concluded.

Elevator down

Matthew Bradbard, president of commodity brokerage firm MB Wealth, who was until recently bullish on silver, said that he is not comfortable with the structure due to the downside risk.

"Silver has been up 45% in the past four months. Today [Tuesday], it was down 4%. It can correct 20% in one or two months. So I don't think I would want to be locked in for six months. I'm not saying that silver is going to fall by 20%. But it's possible. Everybody is moving into metals. I was bullish on silver, but I reversed the trade a couple of weeks ago. I'm now looking for a nasty correction in metals. Gold, silver - those metals, they take the stairs up and the elevator down," Bradbard said.

Bradbard said that he is now bearish on silver short-term.

He would not be interested in the notes because he wants to have the flexibility to reverse a long position on this precious metal if a correction occurs.

He said that such correction is likely to happen within the next six months.

"It could be if stocks fall in price. Stocks have rallied 15% for no good reason. If there is a correction, people will be forced to sell precious metals to cover their margins," he said.

"If the Fed starts raising rates next year, and they are going to raise rates next year, precious metals will fall.

"You have all sorts of potential triggers for a correction in gold and silver: profit-taking, market manipulation."

Over the long-term, though, Bradbard said that he remains "extremely bullish on silver," adding that, "if silver falls by 7% to 10%, I will be buying it again.

"But I don't like the risk/reward [of the note]. For the next six months, you're not really protected if there is a 20% correction and you're capped at 9%."

The underwriter is Credit Suisse Securities (USA) LLC.

Fees are 2%.

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