Advisers discuss Credit Suisse’s bull deal, GS Finance’s bearish play, both on single asset

By Emma Trincal

New York, Oct. 4 – Two recent deals offered investors exposure to a single underlying asset, an opportunity to avoid “worst-of” fatigue. The two deals are different – one is bullish, the other, bearish – but they have in common a straightforward strategy, one adviser said.

The first trade offers unlimited upside participation in a basket of indexes with barrier protection.

Credit Suisse AG, London Branch priced $2.94 million of 0% trigger securities due Sept. 22, 2026 linked to an equally weighted basket consisting of the S&P 500 index and the Russell 2000 index, according to a 424B2 filed with the Securities and Exchange Commission.

If the basket return is zero or positive, the payout at maturity will be par of $10 plus the basket return.

If the basket declines but finishes at or above 76.92% of its initial level, the payout will be par.

Otherwise, investors will lose 1% for each 1% decline of the basket.

The second deal presented a strong bearish bias.

GS Finance Corp. priced $2 million of 0% digital index-linked notes due Sept. 20, 2023 linked to the S&P 500 index, according to a 424B2 filing with the SEC.

If the index return is greater than or equal to negative 34%, the payout at maturity will be par plus 5%. Otherwise, investors will lose 1.5152% for every 1% that the index declines beyond 34%.

A good hedge

Carl Kunhardt, wealth adviser at Quest Capital Management, looked at the GS Finance deal first.

“You’re getting this huge protection of 34% and that’s through a buffer. What attracts me even more is this absolute return,” he said.

“If I’m down 30%, I’m up 5%.

“You’re giving up the upside and you’re throwing the S&P into a bond. But volatility is to your advantage You’re using it to get the absolute return.

“I would do that.”

Kunhardt would use the notes either in his alternative investment allocation as a hedge or in his fixed-income bucket.

“If I’m down 50%, I’m only losing 24% When was the last time the S&P was down 50%?

“This would be a good hedge. It’s a negative trajectory to equity returns.”

No cap

Kunhardt said he liked the Credit Suisse deal just as much.

“I would do it also. One doesn’t preclude the other.”

The least attractive aspect of the deal however was its length.

“Five years is kind of long although it’s pretty typical. It’s not a strong negative but sort of a negative,” he said.

Aside from the longer tenor, Kunhardt was comfortable with the unlevered upside exposure.

“I love my uncap. I’m perfectly comfortable with the one-to-one.”

The “loss” of dividends was not significant, he noted.

The S&P 500 index and the Russell 2000 index have dividend yields of 1.39% and 0.75%, respectively.

“I’m losing about 1% in dividend. Meanwhile my upside is uncapped, and I have this big 23% barrier.”

Asset allocation

Both offerings would fit in the equity portion of a diversified portfolio.

The advantage of the notes compared to a long-only position were obvious to him.

“You’re going to invest for five year and lose 1% in dividend, but I’m going to give you a 77% barrier on the downside...Yes, please. I want the downside protection,” he said.

The GS Finance deal was “completely different.”

“With this one, I’m taking away your upside potential. You’re capped to 5%. But for that, I’m giving you a huge buffer and you’re also getting absolute return up to 34%.

“That’s not protection. That’s hedging my downside,” he said.

Kunhardt said the two deals despite their differences had one thing in common.

“They have different objectives. But each has a clear strategy and a straightforward way to achieve it without bells and whistles,” he said.

Weak hedge

A financial adviser held the opposite view on both deals.

“The GS deal is obviously bearish. You are limiting your return to 5%. In a two-year period, statistically, the market is going to be higher than 5% three out of four times. By default, I’m betting against the market and the odds are not in my favor,” he said.

This adviser said he understood the appeal of the notes as a hedge. But he did not find the hedge to be efficient.

“I’d rather put some money in Treasuries. If the market goes down 34%, you can bet that Treasuries will be up 5% and probably more in a flight to safety.

“I think you’re giving up way too much of the upside,” he said.

Not a worst-of

This adviser pointed to two advantages regarding the other deal from Credit Suisse.

“The five-year is much more up on our alley,” he said.

“You’re buying the market over a market cycle. We like that.”

As with the other note, avoiding the worst-of payout was a plus, he said.

“I’m much more comfortable with this 50/50 split than a worst-of. It’s more understandable. You know what you’re going to get,” he said.

Recent sell-off

But the protection offered over the two-year period, while significant, did not warrant giving up leverage and dividends on the upside, he noted.

He pointed to recent market moves, which have brought some margin of safety.

The Russell is 6% off its 52-week high of March. The S&P 500 index lost 5.5% from its 52-week high of early September.

“The market has come down, sold off. We’re getting more reasonable values,” he said.

Not enough upside

While this adviser was comfortable with longer-dated notes, he also wants to see in a note enough upside potential to be able to outperform a long-only position.

“The problem with this note is you’re not getting compensated on the upside for being tied up for five years,” he said.

“I’m losing more than 5% in dividend over the period.

“There is no leverage whatsoever.

“I’m just getting a barrier on the downside but I’m giving up too much for this.

“If only they offered some leverage. Even 105% would at least protect me from the loss of dividend.

“But as it is, I don’t really see any value,” he said.

For the Credit Suisse deal (Cusip: 22551G168), UBS Financial Services Inc. is the distributor.

The notes settled on Sept. 22.

The fee is 3.5%.

For the GS Finance offering, Goldman Sachs Group, Inc. is the guarantor and Goldman Sachs & Co. LLC, the agent.

The Cusip number is 40057JLG9.

The notes settled on Sept. 27.

The fee is 1%.

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