Credit Suisse’s digital plus notes tied to S&P, Russell offer uncapped upside, low barrier

By Emma Trincal

New York, May 12 – Credit Suisse AG, London branch is prepping a worst-of digital note showing an “attractive” feature, according to financial advisers. Instead of capping the upside, the digital payout represents the minimum payment if both underliers end up positive. Considering the digital return as well as the size of the barrier on the downside, advisers said the structure was compelling.

Credit Suisse plans to price 0% digital plus barrier notes due June 4, 2021 linked to the S&P 500 index and the Russell 2000 index, according to a 424B2 filing with the Securities and Exchange Commission.

If each index finishes at or above its initial level, the payout at maturity will be par plus the greater of a fixed return of 57% to 61% and the index gain of the worse performing index. The exact digital return will be set at pricing.

If either index falls but by no more than 50%, the payout will be par.

If the index finishes at or below the 50% knock-in level, investors will be fully exposed to any losses of the worse performing index.

Alpha

“That’s a pretty broad range for outperforming the market, which is good,” said Steve Doucette, financial adviser at Proctor Financial.

“You can be down 50% and with the minimum return, up 60%. That’s a 12% a year. As we go back to the new normal, we’re expecting 6% or 7% in the years ahead....So 12% a year is pretty good.”

Doucette said he liked the deal because he uses structured notes to try and outperform markets in both directions.

On the downside, the odds of beating the market were significant given the low barrier threshold.

The upside also offered reasonable odds of generating alpha.

“Unless both indexes go up by more than 12% a year you’re going to outperform on the upside. If you don’t, nobody is going to complain about 12% a year. You’re giving up some because you’re only getting the worst-of. But you’re still looking at a pretty good return.”

Term

Doucette said the long duration may also represent a plus.

“As we don’t know when the next bear market is going to come in...we’re already exceeding historical norms for the duration of this bull...extending the duration on this to get these terms is reasonable,” he said.

Doucette said he is “starting to pay attention” to digital notes. But too often the fixed payment is not only low but also caps the upside, two problems not seen with the Credit Suisse notes.

“I’ve seen five-year digitals giving you 7% a year, not 12%. Once you get it, you’re capped,” he said.

“This one is uncapped and it’s a good coupon. I kind of like that.”

Sideways bet

Tom Balcom, founder of 1650 Wealth Management, said that a very bullish investor should not choose this product as investors in structured notes have to forego dividends.

“But for someone who thinks the market is going to trade range bound, this one makes a lot of sense,” he said.

“If the market is flat or slightly down you get your money back. You only lose if it falls by half which is very conservative.”

He said the unpaid dividends are roughly 2% a year based on the respective yields of the indexes.

“OK. So you’re losing 10% in dividends. But if there’s a 30% pullback, you get all your money back.

Clients would be ecstatic about that,” he said.

Up and down ranges

On the upside, the odds for a positive outcome were also favorable as long as the worst-performing index finished positive.

“You get at least 57%. That’s not bad for an individual who believes we’re going to trade range bound in the next five years,” he said.

Conservative investors, who worry about losing principal, would probably find the 50% barrier very enticing as well, he added.

Long duration

Balcom said he has not bought any worst-of deals so far. When the underlying assets are uncorrelated, those structures become riskier. But his reluctance had to do with duration, not correlation.

“Most of our clients invest for less than three years,” he said.

“Uncorrelated assets pose a risk but most equity indices are pretty correlated.

“At least in this one, the correlation between the S&P and the Russell 2000 is pretty strong. It lowers your risk a lot. In fact it’s safe to say that if there’s a pullback the Russell with a higher beta would be the worst performer. It would have a bigger drawdown than the S&P.”

For his typical clients who have a “day-by-day time horizon,” a five-year term would not be appropriate.

But for younger clients, the notes may offer some benefits, he said.

“I’ve seen digitals but it’s the first time I see that kind of structure with a minimum payout and it’s a pretty steep minimum.

“With a 50% barrier you’re limiting your downside risk a lot.

“This is a very attractive version of a structure that sometimes makes people nervous. Who wants to get the worst return of two indices? But this one has very attractive terms.”

Credit Suisse Securities (USA) LLC is the agent.

The notes will price on May 31 and settle on June 6.

The Cusip number is 22548Q6J9.

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