Credit Suisse’s $10.14 million trigger notes on S&P 500 offer short-term dual directional play

By Emma Trincal

New York, April 26 – Credit Suisse AG, London Branch’s $10.14 million of 0% trigger performance securities due Nov. 3, 2022 linked to the S&P 500 index offer a satisfying cap for short-term investors looking for a dual directional bet.

If the index finishes above its initial level, the payout at maturity will be par plus the gain, capped at par plus 16.35%, according to a 424B2 filed with the Securities and Exchange Commission.

If the index falls by up to 10%, the payout will be par plus the absolute value of the index return.

Otherwise, investors will be fully exposed to the index’s losses.

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

“The U.S. Large cap asset class is part of my core holding. Everyone has U.S. blue chip in their portfolio so the whole question becomes am I better off with the note than with a direct investment in the index.”

For somewhat bullish investors, the notes offered a relatively attractive payout.

“If you are positive, obviously you are focusing on the upside participation not the downside, and the cap is high enough to give you 11% a year, which is better than what most analysts expect,” he said.

Meanwhile, investors were not penalized on the downside as the structure gave them protection and an opportunity to profit in a correction scenario.

“The downside has a sweetener with the protection. It’s not a buffer, but everyone now is used to barriers. Barriers are the most common type of downside protection,” he said.

“And when you do get that protection with absolute return, that’s a double sweetener.”

Timeframe

Kunhardt said he also liked the short tenor of the product.

“Twelve to 18 months, that’s my sweet spot,” he said.

“Your biggest challenge will be reinvestment. Our equity outlook is quite conservative. We expect about 6.5% a year for the next five years. If the S&P does better and you hit your double-digit cap, it’s not going to be easy to replace this note at maturity.

“You’re offering me the S&P with less risk potentially. What’s not to like in there?”

Credit exposure

The creditworthiness of the issuer could be a concern for some given the bank’s losses stemming from the implosion of hedge fund Archegos Capital Management.

The credit default swap rates widened in early April during the announcement but have tightened since then, according to financial information service provider Markit.

Some analysts however suggest that the billions of dollars in losses induced by the exposure to a highly leveraged hedge fund are reminiscent of what happened during the financial crisis and may continue to have a negative impact on some of the banks the most exposed to the blowup, such as Credit Suisse.

Kunhardt was not overly concerned.

“I like Credit Suisse. They took a hit. It’s just the way it is. They’ll get over this, and if not, do you really think the Swiss government is going to let them go under? It’s one of the primary national banks,” he said.

Buyers of structured notes were extremely vigilant about credit risk exposure in the years that followed the fall of Lehman Brothers in 2008. But for many, the risk is not as much of a concern as it was then.

Kunhardt explained why.

“There was a time when people used to believe that there was no way a developed country would allow a major bank to go under. Then the Bush administration allowed Lehman to implode. Look at what happened then?

“The government will go to any end to make sure any big bank stays solvent. Everybody agrees. We’re not doing that again.”

Not short enough

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, did not think the protection against a market decline was sufficient.

“Even though 18 months is considered short term, it’s a little longer than I would want in this market,” he said.

“I would be more comfortable with something much shorter.”

“The 16.35% return on the upside is reasonable. But it doesn’t protect against the big drop.”

Barrier, absolute return

As always, the note’s benefits depend on investors’ market outlook.

“If you’re looking at a flat to up market for the next 18 months, then it’s a good option,” he said.

“But I’m more cautious. I think there are risks on the downside over the short term. A 10% protection that can be knocked out is not going to be enough. I would have to hedge it myself, which would be expensive.”

Having a range of 10% for the absolute return is only useful for investors who don’t expect major losses.

“It’s nice to have if you have the conviction that the market cannot drop more than 10% in 18 months. That’s not my view. So, for me, this barrier and the absolute return that comes with it are not really helpful,” he said.

On the other hand, Chisholm was satisfied with the upside.

“The cap is reasonable, and I don’t mind the one-to-one. If the market is going to go anywhere up, you’re not going to need the leverage,” he said.

“I’m just not comfortable with that protection. I’d want to have more.”

Credit Suisse Securities (USA) LLC is the agent. Morgan Stanley Smith Barney LLC is handling distribution.

The notes settled on April 23.

The Cusip number is 22551F772.

The fee is 2.5%.

© 2015 Prospect News.
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