Credit Suisse’s absolute return buffered notes on S&P, Russell more for bears than bulls

By Emma Trincal

New York, Oct. 22 – Credit Suisse AG, London Branch’s 0% absolute return buffered securities due May 2, 2023 linked to the lowest performing of the S&P 500 index and the Russell 2000 index provide a hedge for mildly bearish investors, but the rewards on the upside are limited, advisers said.

If each index finishes at or above its initial level, the payout at maturity will be par plus the return of the worse performing index, capped at par plus 15%, according to a 424B2 filing with the Securities and Exchange Commission.

If either index falls but neither falls by more than 15%, the payout will be par plus the absolute value of the return of the worse performing index.

Otherwise, investors will lose 1% for each 1% decline of the least performing index beyond the 15% buffer.

Mostly bearish

“This is kind of bearish. You’re willing to take the worst-of return on the upside,” said Steve Doucette, financial adviser at Proctor Financial.

“The absolute return is nice. The buffer is nice.

“Even if you burst the buffer, you’re still ahead.

“But it’s really more bearish than it is bullish. You’re not expecting much on the upside, especially with a 15% cap and no leverage whatsoever.”

Correlation

As with any worst-of, the correlation between the underlying has implications on the risk.

“There have been divergences between small-caps and large-caps. But they’re closely correlated,” he said.

The coefficient of correlation between the S&P 500 index and the Russell 2000 index is 0.932.

“Still there’s a little bit of a gap.

“Small-caps have been slaughtered earlier this year. Large caps have been slaughtered too. But large-caps are back, and small-caps have not totally recovered.”

Best-of

Any “divergence” increases the risk on the upside. If one index performs poorly while the other does not, investors can’t expect one’s good return to offset the other’s lower one. They will be exposed to the worst-performer.

On the other hand, the worst-of on the downside is a plus, he noted as it will extend the absolute return as long as the declining worst-performer does not fall by more than 15%.

“To the extent that you’re capturing the worst-of, the note is actually a best-of on the downside. It favors you,” he said.

“But it has to fall in that range.

“15% is a pretty tight range in a volatile market. You capture the absolute return but up to a point.

“As soon as one goes down more than 15%, you’re back in worst-of mode. If one drops 10% and the other 30%, you’re down 15%.

Limited use

Doucette said he would not use the notes because the payout is skewed toward the downside.

“Do I want to be bearish over that period of time? I don’t know. That’s the one-million-dollar question.

“I don’t have a particular outlook for the next two-and-a-half years.

“I like notes that can outperform both on the upside and on the downside.

“This is not one of them,” he said.

Weak upside

Matt Medeiros, president and chief executive of the Institute for Wealth Management, agreed, saying that the downside payout was more attractive than the upside. But the notes may have a place in a portfolio.

“The terms are attractive except for the cap,” he said.

“If I’m bullish about these equity indices, I will not be getting paid.

“With a maximum return of 15% over two-and-a-half years, I’m likely to be capped out.”

The choice of two large, well-recognized equity benchmarks was positive.

“Correlation has been high for quite some time. I don’t know if we’ll see any divergence for some time.

“That, of course, is a good thing since it’s a worst-of,” he said.

Timely absolute return

Medeiros said that current market conditions make it challenging to have a view for the next two-and-a-half years.

“I’m neutral, in part because of the current uncertainty.

“There’s as much likelihood of surprises on the upside as surprises on the downside because of where we are in the economy.

“The absolute return component is the most attractive piece of this.

“I’m very intrigued by absolute return strategies in periods like today when we are at a turning point in the market cycle especially when you take into consideration current economic indicators.

“Absolute return notes make sense especially when combined with a buffer.

“It wouldn’t be as good if it was built on a barrier.

“The buffer makes all the difference.”

Credit Suisse Securities (USA) LLC is the agent.

The notes will price on Oct. 27 and settle on Oct. 30.

The Cusip number is 22552WNX9.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.