Credit Suisse’s Bares tied to S&P 500 get high scores with no cap, buffer and leveraged return

By Emma Trincal

New York, Jan. 27 – Credit Suisse AG, London Branch’s 0% Buffered Accelerated Return Equity Securities due Feb. 4, 2021 tied to the S&P 500 index offer investors willing to invest in a longer-dated note the benefit of a buffer on the downside and a full leveraged exposure on the upside.

This combination gives the product a set of high scores, according to Future Value Consultants’ research methodology.

If the index return is positive, the payout at maturity will be par plus 123% to 129% of the gain. Investors will receive par if the index falls by up to 15% and will lose 1% for every 1% decline in the index beyond 15%.

“This note has impressive scores. Part of it is the simplicity of the product. It’s very straightforward,” said Suzi Hampson, structured products analyst at Future Value Consultants.

“You’ve got leveraged return, uncapped return...it’s linked to the S&P... Four-year is probably longer than a lot of products in this category, but some investors who are comfortable doing five-year may find it attractive.”

Future Value Consultants in its research, assess risk, return and price using a variety of proprietary scores in order to compare a product with all products and similar products.

The so-called “same product type” category in this case is leveraged return.

Market risk

The risk associated with a structured note is assessed by Future Value Consultants’ riskmap. The rating on a scale of zero to 10 measures the risk, with 10 being the highest level. The riskmap is obtained by adding its two sub-components: market risk and credit risk.

The notes have a 2.11 market riskmap versus an average of 1.42 for the same product type, according to Future Value Consultants’ research report.

“It may seem odd to have more market risk for this product compared to other leveraged return notes given the 15% buffer,” she said.

The leveraged return category includes all leveraged notes, including those with protection as well as those without.

Risk and maturity

She attributed the excess market risk to the longer tenor as the majority of leveraged products are shorter than four years.

“Most products are on the S&P, so it’s not an underlying issue,” she said. “It’s probably due to the longer maturity.

“When you take a four-year compared to a one-year for instance, your risk of big losses increases even with the buffer.”

This assumption may seem counter-intuitive to many investors who extend maturities as a form of risk mitigation. But Hampson explained how her firm approaches risk.

“When people look at statistical data or past performance during any given trailing period, they find that a long-term note is less risky. That’s often true. But that’s based on historical data. We don’t measure risk on this basis. We use a forward-looking approach. We’re modeling our market riskmap based on current expected returns.

It’s a risk neutral approach. From that standpoint, the probabilities of losses are not the same as when you look at what happened before.

Credit, riskmap

The credit riskmap is 0.58, which is higher than the 0.28 average for leveraged return category, the report showed.

“Unless the product is issued by a particularly risky issuer, and that’s not the case here, generally, the credit risk is linked to the maturity, which makes sense. The longer you are invested the longer you are exposed to the risk of a default,” she said.

Adding the two risk components gives a 2.69 riskmap, which is more than the average of 1.71 for similar products.

Return score

The return score is Future Value’s measure of the risk-adjusted return on a scale of zero to 10.

It is calculated based on the best among five return scenarios, which for this particular product would be bullish. The other four market assumptions are: neutral, bearish, low volatility and high volatility.

The return score is 8.93 versus an average of 7.40 for similar products and 6.53 for all products.

Bullish

This positive return indicated that the risk-adjusted return can still be high when the product is risky, she explained.

“Just because the risk is higher than average doesn’t mean you’re not getting adequately compensated by the return,” she said.

“What you want is to be compensated for the risk. That’s what this score is about, and this is obviously the case with this product.”

The score is calculated based on a bull market assumption. In such scenario the leveraged return and the absence of a cap will maximize the return, allowing the product to outperform the S&P 500 index in certain conditions, she explained.

In addition, the relatively long maturity can help investors compound more gains over time.

“The issuer could have structured the notes more aggressively by eliminating the buffer or reducing its size in order to add more leverage,” she said. “Obviously the 15% buffer has a cost. But it would have changed the style of the notes altogether. This one offers a little bit of everything for both the conservative and the aggressively bullish investor.”

Value

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10.

This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

The notes showed a 9.57 price score compared to the 8.84 average for the same product type.

“We’re talking about a pretty exceptional price score,” she said.

“The S&P is a very liquid index. The transparency is beneficial. The score suggests it’s not going to be expensive to put this product together,” she said.

“The longer maturity also helps because we’re looking at the cost per annum.”

Overall score

The overall score measures Future Value Consultants’ general opinion on the quality of a deal. The score is the average of the price score and the return score.

The notes have an overall score of 9.25 versus 8.12 for the average leveraged return note and 6.80 for all products.

“Overall this product is doing very well,” she said.

“We’re having a brilliant price score and a very good return score. There is nothing controversial about these notes.

“As long as investors are willing to consider a four-year product and take the credit risk, everything else is quite attractive. You get the leverage, the uncapped upside and a little bit of a buffer.

“This is quite a positive offering.”

Credit Suisse Securities (USA) LLC is the underwriter.

The notes will price on Feb. 1.

The Cusip number is 22548QT88.

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