Credit Suisse’ autocalls on S&P, Dow designed for conservative investors, but credit is a risk

By Emma Trincal

New York, Jan. 26 – Credit Suisse AG, London Branch’s 0% autocallable CS notes due Jan. 30, 2026 linked to the lowest performing of the S&P 500 index and the Dow Jones industrial average provide several attractive terms, which are mostly designed for risk-averse clients, advisers said. But for some, the credit risk and possible cap after one year may be concerning.

The notes will be called at par plus an annualized call premium of 10% if the lowest performing index closes at or above its initial level on Jan. 26, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If the notes are not called and the lowest performing index finishes positive, the payout at maturity will be par plus 1.5 times its gain.

Otherwise, the payout will be par.

Hoping to last

Steve Doucette, financial adviser at Proctor Financial, expressed concerns about seeing the return capped by the call premium.

“The only time you’re going to underperform here is if you get called and the market is up 20%. You just can’t time the market,” he said.

“But this is a great investment for a conservative investor.

“You hope you don’t get called and capture this leveraged upside. If you do get to maturity, great. You’re not capped, and you have full principal protection.”

But for this adviser, the principal protection was not the most attractive piece of the structure.

“Do you really need full downside protection over a three-year period? It’s only there to provide the guarantee you need if you’re very skittish,” he said.

Bad memories

Doucette brought up the creditworthiness of the issuer as a serious risk to the investor.

Credit Suisse has been struggling amid losses in its investment banking business and clients’ outflows. Its stock price has plummeted, and the bank is going through a restructuring and recapitalization process. As a result of those difficulties, the cost of insuring Credit Suisse’s debt against default has skyrocketed.

“If investors won’t be hit by market losses, they remain exposed to the credit risk of Credit Suisse, which is substantial,” he said.

The Swiss bank’s five-year CDS spread was 274 basis points on Thursday versus 64 bps for UBS and 54 bps for BNP Paribas, according to S&P Global Market Intelligence.

In the United States, the big banks show CDS spreads in a 70’s to 80’s bps range.

“I would be concerned about the credit risk exposure. It brings back memories of the financial crisis. I would probably price it with another issuer, a bank with a better credit,” he said.

Income tax

Another problem with the note was its tax treatment.

“We all know the headache that comes with principal-protected notes. Your entire investment is taxed as ordinary income. That’s not enticing at all,” he said.

The tax treatment also complicated the asset allocation process, he added.

Since Doucette was not convinced that the 100% principal-protection was even necessary over the three-year term, he would eliminate it altogether.

“I would convert the note into something with a better tax treatment. I would put a buffer on it,” he said.

Another option would be to use the investment in a retirement account.

“In that case, yes, the tax treatment is irrelevant. But it may make the asset allocation process a bit more cumbersome because we tend to put different types of notes in a retirement account,” he said.

“Having a favorable tax treatment is more important to me than the full principal protection.”

FOMO

Doucette would look at buffers in the 5% to 15% range or more if he could negotiate a better size.

“I’d play with the terms. I don’t like the note as it stands, but it’s definitely an interesting concept,” he said.

The product was catered to conservative investors seeking to avoid market losses. But there was a cost, he said.

“You’re probably going to get called and get 10%. I’m not saying that 10% is not a decent equity return. But again, what if the market is up 20%, 25% a year from now?

“This thing is sold, not bought. The optics look great. Investors will hear all the things they want to hear.”

But Doucette considered the risk of “missing out” to be too high.

“I’m always thinking long term, trying to capture the best return while minimizing risk.

“This note is not the right answer,” he said.

Attractive risk return

Matt Medeiros, president and chief executive at the Institute for Wealth Management, had a different view, finding the principal-protection valuable.

“If you’re comfortable with the issuer risk, the terms are very attractive,” he said.

“Getting a 10% cap on the first year if it’s potentially called is a reasonable level especially when coupled with a 100% downside protection.

“Having an extra kicker on the upside if you go to maturity is appealing too.”

Mitigating risk

Medeiros said he was not overly concerned about the risk of underperforming in a market rally in the event of a call after one year.

“First, you’re not putting all your clients’ assets in this. Also, I haven’t seen a lot of people that are that bullish, people who expect to see monster returns,” he said.

Structured notes can be helpful in today’s uncertain environment as they let investors modify their risk-return profile,” he added.

“These are times when you want to participate but you also want as much protection as you can.

“That’s the objective.

“When the market becomes riskier you don’t want to take additional risk.”

Being able to take an equity position without the equity risk made the notes “very appealing,” he said.

“I can definitely use it as a core portion of my portfolio,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes are expected to price on Jan. 26 and to settle on Jan. 31.

The Cusip number is 22553QPZ4.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.