Credit Suisse’s $3.93 million of buffered leveraged notes offer non-U.S., uncapped exposure

By Emma Trincal

New York, Aug. 4 – Credit Suisse AG, London Branch’s $3.93 million of 0% buffered accelerated return equity securities due Aug. 2, 2024 linked to the least performing of the iShares MSCI EAFE exchange-traded fund and the Euro Stoxx 50 index allow investors to gain unlimited upside exposure to international equities, in particular Europe.

This deal comes on the heels of several others providing leveraged exposure with no cap over relatively short maturities, according to data compiled by Prospect News.

If each asset closes at or above its initial level, the payout at maturity will be par plus 1.85 times the return of the least performing asset, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the least performing asset falls by 10% or less and will lose 1% for every 1% that the worst performer declines beyond 10%.

Timeframe

“Three-year, 1.85 times, no cap on developed markets, I think it’s pretty good,” said Andrew Valentine Pool, main trader at Regatta Research & Money Management.

“I like the terms.

“And I like the three years. If we do have a slowdown, we would probably come out of it three years from now.

“Some people think it may take longer. But I don’t. I’m optimistic.”

European play

The bulk of the exposure is on European stocks, he noted.

More than 62% of the iShares MSCI EAFE fund consists of European stocks, according to iShares.com.

The ETF replicates the MSCI EAFE index, which gives access to developed markets at the exclusion of the United States and Canada.

Given the overlap, the two underlyings move relatively in sync as measured by their high coefficient of correlation of 0.98.

“We like European equities right now,” said Pool.

“About 80% to 83% of our portfolio are domestic equities and we want to add to our international holdings. This would be a good fit for diversification.”

Buffer sizes

Pool said he liked the downside protection as well.

“I like all buffers. Maybe not a 5%. But 10% is a good size,” he said.

“A 5% buffer is kind of small. If the index drops 21%, you can tell your clients that they’ve lost only 16% but that doesn’t carry a lot of weight.

“At 10%, clients begin to appreciate the safety built into the notes.”

Worst of benefits

A market participant said the notes were properly priced.

“Even if the underlyings are correlated, you’re still exposed to the worst of. Worst-of payouts add dispersion risk. When volatility isn’t that high, the worst-of gives you the additional premium that you need,” he said.

He explained that if prices do not move much, at least the low or negative correlation between underlying assets will bring better terms.

“Better terms can vary. It’s up to the client. It could be a shorter tenor, it could be a higher cap or no cap and also more leverage.

“Playing with lower correlations makes a difference. You wouldn’t need a worst-of in a highly volatile market. But right now, you do. It gives you the necessary premium to make the product compelling.”

Short term, no limit

Some firms, in particular GS Finance, have recently issued leveraged uncapped notes on relatively short durations, all shorter than five years.

Recent examples include GS Finance Corp.’s $2.83 million of two-year notes linked to the Euro Stoxx 50 index and the iShares MSCI Emerging Markets ETF.

The payout is par plus 2.38 times the return of the lesser-performing underlier. The buffer is kept small at 5%.

Using an identical buffer size and tenor, the same issuer priced $4.22 million of notes linked to the least performing of the Russell 2000 index, the S&P 500 index and the Dow Jones industrial average with 1.56 times the gains and no cap.

Both deals priced last week.

GS Finance is also planning to price at the end of the month a three-year deal linked to the same three indexes. Gains are levered up by a 1.3 multiple with no maximum return. The buffer size is 10%.

Goldman Sachs’ funding spreads may help. While credit default swap rates for U.S. banks are relatively tight, Goldman has the widest spreads. Its five-year CDS spreads are 57 basis points versus 45 bps for JPMorgan and 48 bps for Bank of America, according to Markit.

On the commodities side and staying on a short length, BofA Finance LLC last week priced $7.71 million of leveraged notes on an equally weighted basket of commodities (West Texas Intermediate crude oil, spot price of copper and spot price of silver) paying 1.32 times the basket gain with unlimited upside. The tenor was 2½ years. In this case, however, investors have full exposure to market risk.

Credit Suisse Securities (USA) LLC is the agent.

The notes settled on Wednesday.

The Cusip number is 22552XPJ6.

The fee is 1.5%.

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