Credit Suisse's Bares tied to iShares MSCI EAFE, S&P 500 are worse-of with high potential gain

By Emma Trincal

New York, May 6 - Credit Suisse AG, Nassau Branch's 0% buffered notes linked to the worse-performing underlying among two equity benchmarks offers a limited yet attractive potential return with some protection on the downside, sources said.

The structure, often called "a worse-of," is also unusual, they noted.

Credit Suisse priced $5 million of 0% Buffered Accelerated Return Equity Securities due Nov. 10, 2011 linked to the iShares MSCI EAFE index fund and the S&P 500 index, according to an FWP filing with the Securities and Exchange Commission.

If the final level of the worse-performing component is greater than or equal to its initial level, the payout at maturity will be par plus a fixed payment of 15.45%.

Investors will receive par if the worse-performing component falls by up to 20% and will lose 1% for every 1% decline beyond the buffer.

Limited upside

Shana Orczyk, research analyst at wealth advisory firm Peak Financial Management in Waltham, Mass., analyzed the limited upside.

"I look at structured products as a bet, as that's what this is. It's like a casino. The bank is the House and I take the bet. They often structure those deals more in their favor, so as an investor, I want to know what's the scenario in which I am the most likely to beat the House," said Orczyk.

"And here, I win when the benchmarks do less than 15.45%," she said.

Orczyk said that the payout, which will not exceed 15.45%, operates like a cap as it limits the upside.

If a direct investment in the two indexes generated a higher return, she reasoned, investors in the notes would have missed an opportunity to earn more.

"That's the greatest risk," she said.

"I think there is a reasonable chance that the two indexes would perform better than 15.45% in the next year-and-a-half. I also think returns are more likely to be better in the U.S.," she said.

The iShares MSCI EAFE index fund is an exchange-traded fund that replicates the performance of the MSCI EAFE index. The index, an equity benchmark for international stock performance, includes stocks from Europe, Australasia and Asia.

Decent protection

Looking at the downside, Orczyk said that the 20% buffer reduces the risk without eliminating it.

"Because of the situation in Europe, there's a good chance that you'd be buying this at the worse time," she said.

"It's entirely possible to get some downside swings. However, the 20% buffer does give you a decent level of protection," she said.

The 15.45% digital potential payout at maturity is an attractive feature for investors, she noted.

"It's not a bad coupon for someone who doesn't want to be in bonds due to low interest rates and who is also reluctant to be in equity. This would be the only scenario in which I would consider it," she said.

Assessing the risks versus rewards, Orczyk said that the limited upside is where she saw most of the risk.

"I think there's a higher probability to outperform the cap than there is to lose by more than 20%," she said.

Odds aren't bad

Stephen Figlewski, professor of finance at New York University Stern School of Business, said, "The most you can make is 15.45%. That's a pretty good return it seems to me considering the level of interest rates. The probability to get it is not bad. Both indexes have to go up. Usually that's what happens with stocks."

A financial adviser said he was comfortable with the risk-return terms offered by the product.

"I don't anticipate that any of the two benchmarks would go down by more than 20% from their current levels 18 months from now," this financial adviser said. "So I think it's a decent opportunity for some upside."

Because volatility has increased and risk is more of a concern, this adviser said that the 20% buffer is worth getting even if part of the price for it is the limited upside.

"I don't think the cap is too low. The market will continue to be choppy, and I don't think it's a good time to take great risk. So I like the fact that you have some downside protection," he said.

Options components

Figlewski said that the 15.45% fixed payment is not technically speaking a cap but rather a digital coupon. He analyzed the product and found that it was structured based on three components.

One piece was a zero-coupon bond. "The zero is what gives you your principal back," he said.

The second piece was a digital option. "The investor buys a digital call. I get 15.45% if the worse of the two goes up," he said.

He defined a digital call as one in which the buyer gets a fixed payment no matter how far the price goes above the strike price.

Finally, the third component is a put. "You are also writing a put as the investor. You give up profit on the put option," he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes carry a 0.1% commission and a 0.15% wholesaling fee.

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