Credit Suisse's $9.4 million 1% coupon notes track equity basket return, feature cap, buffer

By Emma Trincal

New York, July 10 - Credit Suisse AG, Nassau Branch issued last week a four-year coupon-bearing note with an unusual structure. It consisted of a one-to-one participation in the performance of an equity basket limited to a cap but with no return enhancement mechanism along with a buffer on the downside. Sources noted that the combination of a tracker note with a cap, buffer and coupon was not very common.

Credit Suisse priced $9.4 million of 1% coupon buffered securities due July 10, 2017 linked to a basket of indexes and exchange-traded funds, according to a 424B2 filing with the Securities and Exchange Commission.

The basket included the S&P 500 index with a 70% weight, the iShares MSCI EAFE index fund with a 15% weight, the S&P MidCap 400 index with an 8% weight, the iShares MSCI Emerging Markets index fund with a 4% weight and the Russell 2000 index with a 3% weight.

Interest is payable semiannually.

If the final basket level is greater than or equal to the initial basket level, the payout at maturity will be par plus the basket return, subject to a cap of 59.7%. Investors will receive par if the basket falls by 15% or less and will lose 1% for every 1% that it declines beyond 15%.

Small coupon

The majority of deals paying a coupon tend to be reverse convertibles with headline rates reflecting the implied volatility of the underlying securities, according to data compiled by Prospect News. Alternatively, other structures include securities with a lower initial rate such as fixed-to-floating notes or contingent coupons found with autocallable securities, the year-to-date data showed.

A sellsider, however, said that the tracker notes with a buffer and coupon had been done before.

"I'm not sure it's that rare. It doesn't strike me as notable. It's not too complex a deal so that it can't be imitated. I don't think you could say it hasn't been done before," he said.

"It pays a small little coupon, similar to the money markets, and you get a little bit of downside protection in exchange for giving up leverage."

A structurer compared the notes with a four-year Credit Suisse bond yielding 2.1%.

"It's fine. It's a decent deal," he said.

"With this you're only getting 1%, but you have equity exposure in addition to the coupon, which you obviously don't have with a bond.

"They use the dividends to pay for the buffer. Such buffer at 15% is worth not having the leverage."

Broad exposure

Bob Lee, consultant in structured products, formerly with Charles Schwab, said that another appealing factor of the notes is the underlying basket made of three equity indexes and two funds.

"For investors, it provides equity exposure in one simple solution," he said.

"Investors tend to have appetite for broad-based equity exposure.

"On the upside, you have the reasonable expected performance of the underlying. With a basket like that, who needs 100% protection on the downside? Twenty percent or 15% is more than enough because you have diversification. Unless you have some sort of catastrophe event, your performance should be very reasonable.

"The 1% coupon compensates you for the four-year holding. Call it an annual dividend for your equity basket. If you look at comparable four-year notes, you may get more yield but you won't get the equity return.

"The coupon is a way to entice investors to replace maturing bonds with a coupon-bearing instrument linked to equity returns.

"The rationale, first and foremost, is to get exposure to equity. It gives you the added bonus of a small income stream.

"And yes there is a cap. But a cap of 60% over a four-year period is pretty good. I would be very happy if I had that type of return. One has to be content with that.

"I think this note is a reasonable combination of greed and fear."

The notes (Cusip: 22547Q4J2) priced on July 3.

Credit Suisse Securities (USA) LLC was the underwriter.

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