Credit Suisse's Bares linked to S&P MidCap 400 offer 'balance' at risky point in market cycle

By Emma Trincal

New York, Feb. 26 - Credit Suisse AG, Nassau Branch's 0% Buffered Accelerated Return Equity Securities due Sept. 23, 2015 linked to the S&P MidCap 400 index offer an attractive payout, but the level of the index suggests that mid-cap stocks may be overbought, making the timing of the investment risky, according to financial advisers.

If the final index level is equal to or greater than the initial level, the payout at maturity will be par plus 150% of the index return, subject to a maximum return of 26.25% to 29.25%. The exact cap will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par for losses of up to 10% and will share in any losses beyond the buffer.

"You always want to make sure that the buffer doesn't reduce too much of the upside because it's always a tradeoff, a balancing act between the downside protection, the upside potential and the length of time," said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

"This one strikes a nice balance."

Buffer and tenor

"You've got a 10% buffer amount. It's a little bit lower than what I would like to see, especially for short-term notes," he said.

"It seems counterintuitive, but the longer the notes, the less buffer I would actually require.

"Ideally, I would like to see a 10% to 15% buffer on a five- to seven-year note. For 13 months to a two-and-a-half-year product, I'd rather have 20% to 30%," he said, explaining that during longer periods of time, market corrections usually reverse to positive territory.

"Historically speaking, the worst performance has only been down 25%, and you usually recover within that five to seven years period of time."

The buffer amount, however, was not essential, Kalscheur noted.

"It's not a deal killer. But you just want to make sure you're not paying more buffer than you need because each time you have more protection, you are giving something else up," he said.

The 10% downside protection offered by these notes did not penalize investors too much in terms of potential returns, he said.

"It's a very decent upside. The range for the cap, between 26.25% and 29.25%, with the leverage being built in there is attractive.

"It's not an unlimited return; it's not a big buffer; but it's a two-and-a-half year. It's a little bit of all the right pieces."

Balancing act

"It's very nice if you're not a huge raging bull on the market. At least you have the opportunity to capture more return if the market is up even by a marginal amount of 7% because 7% is all you need to maximize your upside to 10.5% a year. And with that type of return, which is your cap, you're going to do very, very well," he said.

Besides three key elements of a deal - tenor, upside and downside protection - fee levels were an important factor to consider when evaluating a note, he said.

"The prospectus doesn't say anything about the commission. Very rarely do they have anything on these things," he said.

"I would expect for institutional and fee-only RIA products, in terms of institutional pricing, I'd like to see between 75 basis points and 1% over the course of two-and-a-half years. In general, my rule of thumb is 25 basis points annually. I like to stay in this institutional cost structure.

"But here again, how much fee you pay will determine the type of tradeoff you're getting on the three other legs of a structured product.

"How long you're tying up your money, how much downside protection there is, how much potential return you can expect: these three seem to fluctuate based on each other. And you can throw the fees in there.

"Overall, it's a well-balanced structure. It's a nice offering," he said.

Dangerous market cycle

On the other hand, Brookstone Capital Management chief executive officer Dean Zayed said that the underlying index had reached new highs, making an entry point at today's prices a risky bet.

"If you have a mildly bullish or even mildly bearish outlook, it's not a bad way to get exposure to the mid-cap equity space," Zayed said.

"At this level of the market though, I'm cautious to do anything on a long point-to-point basis, simply because we are at relatively high valuation levels right now.

"Without any kind of coupon paid during the life of the notes, I think it's too risky. The biggest risk is what happens two-and-a-half years from now."

The S&P MidCap 400 index has gained about 40% per year since its low in March 2009. The index is up 6% year to date. It reached its five-year peak on Jan. 31.

"You could have a bull market for the next two years and see your returns completely wiped out in the last six months," Zayed noted.

"I'm not sure you're getting in at the best entry point.

"There are other ways you can get returns, for instance with monthly or quarterly averaging or with notes that pay you a coupon.

"There's a little bit of luck involved in betting that your return in two-and-a-half years will be higher. The timing, especially in an overbought market, is a little tricky."

The notes (Cusip: 22546T2L4) are expected to price March 19 and settle March 22.

Credit Suisse Securities (USA) LLC is the underwriter.

© 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.