Credit Suisse's $4 million contingent notes on three indexes aimed at fixed-income buyers

By Emma Trincal

New York, Aug. 27 - Credit Suisse AG, London Branch's $4 million of contingent coupon callable yield notes Aug. 28, 2023 linked to the S&P 500 index, the Russell 2000 index and the Euro Stoxx 50 index were probably targeted to investors in the fixed-income space, sources said.

They also noted that the placement agent listed on the 424B2 filing with the Securities and Exchange Commission was Incapital LLC.

"It's interesting. Incapital is a fairly large distributor in structured products, but you don't usually see their name on the offering documents. If they were, it's perhaps because the issuer wanted to give them the spotlight," a market participant said.

On the docs

"I'm not sure why they're on the docs," an industry source said. "They're not the underwriter."

The notes pay a contingent quarterly coupon at an annualized rate of 9.5% if each index closes at or above its barrier level, 60% of its initial level, on the observation date for that quarter.

The notes will be callable at par plus the contingent coupon on any interest payment date on or after Aug. 27, 2014.

The payout at maturity will be par unless any index finishes at or below its 60% knock-in level, in which case investors will be fully exposed to the decline of the worst-performing index.

"Incapital distributes a little bit of everything. This 10-year is truly designed for clients used to buying fixed-income transactions," the industry source said.

"Back in the day, the market created range accruals, steepeners. This one is for fixed-income investors, for those who are not afraid of the tenor.

"With yields still very low, you're definitely getting the attention of people from the fixed-income space, people who are going to be attracted to double-digit returns.

"The size was a lot smaller than what fixed-income people usually buy. But that was the target market."

The market participant agreed.

Structurally hybrid

"It is an equity deal given the underlying indexes, but it has a fixed-income type of structure. [Incapital] may want to try to offer this to their fixed-income driven clients, which are the core of their business in general," the market participant said.

"Maybe they're trying to expand their distribution. They work with different issuers. They definitely want to push their presence in the market.

"It's not surprising that they would do this type of product, especially something that's yield-driven like this one.

"What makes it a fixed-income type of deal is the fact that it has a coupon. You can get 9.5% a year. It is not a fixed coupon, and it is contingent upon equity returns, but the conditions to get it are fairly easy because the barrier is quite low even if you need the three indexes to be above 60%. Chances are you're going to get that coupon, especially in the beginning.

"I also see fixed-income-like features in the fact that it's callable, which is pretty common in fixed-income land."

As a trend, issuers have brought to market a greater number of hybrid products to satisfy the needs of yield-seeking investors, he said.

Search for yield

"You're seeing more and more of equity exposures appear in fixed-income deals," the market participant said.

"It's not so much the 10-year tenor that makes it more like a fixed-income product. I think it's more the coupon or the fact that you get a sense that earning the coupon is achievable.

"The chances of any of those three indexes falling by 40% in one year are small, so even though it's built on equity, people seeking income feel comfortable doing that.

Hybrid structures such as the Credit Suisse contingent coupon callable notes may be filling a void, he continued.

"Reverse convertibles, which pay a fixed coupon, for a very long time have been used also by traditional fixed-income investors who needed to generate income for their portfolio," he said.

"But for a while now, there have been a lot of negative press around reverse convertibles, and so people have stopped buying them. Part of the problem is that they were linked to single stocks. Some clients may not be comfortable with single-stock risk.

"In this deal, the three underlying assets are indices. This structure enables clients to get away from single-stock risk.

"You take on index risk, but you're no longer exposed to single-stock risk. That's a good thing. The barrier is fairly low, it gives you a 40% level of protection, which is large. That's also a good thing.

"The negative part is the worst-of payout.

"Then it's a function of deciding what type of risk you are willing to take."

The notes (Cusip: 22547QAA4) priced on Aug. 22.

The fee was 1.5%.

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