Credit Suisse’s Bares tied to gold, silver ETFs provide high return for experienced investors

By Emma Trincal

New York, July 20 – Credit Suisse AG, London Branch’s 0% Buffered Accelerated Return Equity Securities due July 29, 2019 linked to the SPDR Gold trust and the iShares Silver trust provide a high potential return, but investors using the notes should really understand their worst-of payout structure, sources said.

If the return of each trust is positive, the payout at maturity will be par plus the upside participation rate, which is expected to be 150%, multiplied by the return of the lower-performing trust, subject to the underlying return cap that is expected to be 77.5%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the lower-performing fund declines by 15% or less and will lose 1% for each 1% that it declines beyond 15%.

The exact terms will be set at pricing.

Worst of

Such structures are called worst of as investors are exposed to the worst-performing fund.

“Worst of are a great way to extract good returns. Since you’re only getting the performance of the worst of the two, you can purchase more leverage. Without it, you would probably not get a 77.5% cap and you would have a smaller buffer, if any,” a market participant said.

The prices of gold and silver are probably “relatively correlated,” which could slightly reduce risk, he said.

“Both funds are very volatile. These are precious metals; we’re dealing with commodities. ... Also the worst-of payout brings even more risk,” he said.

Investors have to be familiar with the payout structure as well as with the funds they are getting exposure to. Investors should be aware of the risks because the protection has its limits, he noted.

“I’d say this is my only concern. You have a 15% buffer. It’s a hard buffer, so that’s a good thing. But with silver and gold, you can go down 15% very quickly,” he said.

“I suppose the deal is designed for people who consider silver and gold as safe havens and [expect to] see them as a result of this appreciate in price over time. If you’re comfortable with the 15% buffer, this is a good way to get a strong return. You’re talking 21% a year compounded.”

Correlation

Tom May, partner at Catley Lakeman Securities, said that the structure is right for any investor who understands the payout and the risk.

“I don’t think a product can be a bad thing in itself as long as you understand what you’re picking and what you’re giving up,” said May.

In his view, correlation has to be closely examined as silver has been up “a lot more” than gold, he noted.

In the past five years for instance, the iShares Silver trust gained 51% versus an 18% gain for the SPDR Gold trust. Over the past three years, both funds were relatively flat. Year to date, however, silver has continued to solidly outperform gold, up 43% versus 25% for gold.

“They’re both correlated in the sense that they move together, but the magnitude of those moves has been quite different,” he said.

“You’ll get the worst of these whether on the downside or on the upside.

“You just have to be aware that you can have significantly different returns.

“You could get a good return, but it might not happen. It doesn’t mean it’s bad. You get at least a little bit of protection.”

Such protection, however, is not perfect due to the volatile nature of the underlying funds.

“A 15% buffer is not huge for precious metals. Both could go down. At the end of 2013, the gold fund dropped 12% while the silver one went down 21.5%.

“You can’t bank on that kind of buffer to bail you out.”

Credit Suisse Securities (USA) LLC is the underwriter.

The notes will price Friday.

The Cusip number is 22548QCG8.

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