Credit Suisse's Bares with 20% buffer on Russell 2000 may be used as fixed-income substitute

By Emma Trincal

New York, June 3 - Credit Suisse AG, Nassau Branch's 0% Buffered Accelerated Return Equity Securities due June 28, 2016 linked to the Russell 2000 index may be used as an alternative to fixed-income securities despite their equity-linked performance, sources said.

If the index finishes at or above its initial level, the payout at maturity will be par plus a fixed payment of 17% to 19%. The exact percentage will be set at pricing. Investors will receive par if the index falls by up to 20% and will be exposed to any losses beyond 20%, according to a 424B2 filing with the Securities and Exchange Commission.

"I like it," said Carl Kunhardt, wealth adviser at Quest Capital Management.

"In my mind, this is what a structured product should be - a type of fixed-income investment vehicle not necessarily tied to the fixed-income market. You don't have the same credit issues if rates come up. That's why I've been using more structured products lately than normal. Not that I'm very bullish on fixed income, but I still need this asset class."

Kunhardt said that the buffer amount made him feel somewhat confident.

"Twenty percent, that's higher than normal. I do like that," he said.

A+

Kunhardt noted that he was familiar with the issuer, which is rated A+ by Standard & Poor's.

"I've done a number of Credit Suisse. They're usually on the S&P," he said.

"The one we did back in April was a different structure, but like this one, it had an attractive risk-return payoff. It was a callable yield note.

"Another plus is that Credit Suisse doesn't charge huge fees. The one we did, and it's pretty typical, was about 1.85% on a three-year too."

The notes are senior unsecured obligations of Credit Suisse, according to the prospectus.

"Compared to a fixed-income vehicle, you don't have the same position in the capital structure, that's true. But if the institution is doing very well, like Credit Suisse, then it's an A+ bond."

Less interest rate sensitive

Most fixed-income investors and shareholders of high-yielding stocks are currently concerned about the prospect of a rising-interest-rate environment since bond prices move in the opposite direction as interest rates. One of the most difficult challenges of financial advisers currently is to reduce the risk of investors' bond portfolios, he said.

"We're doing more structured products than usual lately because of that," he said.

"Structured notes like this one are less interest rates sensitive. Although you get a fixed rate of return, it's the equity performance that will drive the return.

"I like this one. It's the kind of structured notes I do most often. They're fairly straightforward. There's no game, no gimmick, no mirrors. It's easy to evaluate and easy to explain to the client.

"Also, it has a reasonable buffer. Ours was also a three-year. It had a 30% downside protection, but it was a knock-out level. So between that and a 20% hard buffer like this one, you're getting pretty much the same thing from a risk mitigation standpoint."

One of the drawbacks of the product, listed in the prospectus as a risk consideration, is that investors should not expect to earn more than the digital return of approximately 6% per year, assuming an 18% fixed payment percentage. But Kunhardt said that it would only be a concern for an investor seeking to outperform the index or get full upside participation, which, he said, was not what the notes were designed for.

"If you are among those who think that equity markets are going to do well, which I am, this type of note is pretty interesting as a fixed-income substitute. Getting 18% on three years is definitely better than the average paper out there," he said.

"Of course, you're capped and you may underperform the Russell. But you're not buying this to get equity-like returns. You're buying it for the yield. Getting a 6% annualized return in fixed income is pretty good. You could get that with some high-yield bonds, but how many junk bonds can you put into your portfolio?"

Bond alternative

Greg Feirman, president and chief executive of Top Gun Financial Planning, agreed that the notes offered an attractive alternative to a bond even if no interest was paid and if the principal was still at risk.

"I like it. It's conservative. You're protecting a good deal of the downside. As long as the Russell is up or even flat you're getting the 18% return," he said.

"If you feel confident about equities, if you want to speculate a little, it's a good way to get some pretty good return. You have a decent chance to get that 18% and a low chance of losing any money because you would have to go down more than 20%."

Feirman said that investors are never immune to a bear market, such as 2008 when both the S&P 500 and the Russell 2000 dropped about 35%.

"Of course it could happen again. But even if it did, if the index for instance fell 35%, you would only lose 15%. It's a pretty good risk-return profile. You would do much better than the market if there was another crash like 2008," he said.

"It's a good way to get yield. You get locked in for three years, but the odds of making 18% at the end of the three years are quite high, and you have some limited downside. Eighteen percent is pretty attractive for a three-year if you look at it as an alternative to a traditional fixed-income security. That's the way I would look at it because you get 18% even in a flat market, so the odds are good. Additionally, your downside is protected quite a bit.

"It seems like a pretty good deal."

Credit Suisse Securities (USA) LLC is the underwriter.

The notes (Cusip: 22547Q3D6) will price June 26 and settle June 28.

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