Credit Suisse plans dual directional notes linked to S&P 500; notes fit range-bound view, adviser says

By Kenneth Lim

Boston, Feb. 24 - Credit Suisse launched dual directional buffered notes linked to the S&P 500 index that could be attractive to investors who see a range-bound equity market in the short-term, an investment adviser said.

Credit Suisse, through its Nassau branch, plans to price three series of zero-coupon dual directional buffered return enhanced notes linked to the S&P 500 via placement agents J.P. Morgan Securities Inc. and JPMorgan Chase Bank, NA.

At maturity, the notes will pay par plus double any gain in the underlying index, subject to a maximum total payout that will be set at pricing. The payout will be par plus the absolute value of any index decline if the final index level is flat or down by no more than 10%. Investors will lose 1.1111% of their principal for every 1% than the index declines beyond 10%.

A series due March 17, 2010 will have a payout cap of at least 125.4% of the principal. A second series also due March 17, 2010 will have a payout cap of at least 125.8%. A third series, due Sept. 1, 2009, will have a payout cap of at least 111.85%.

Uncertainty play

The dual directional structure offers a play on the current ambivalence over the direction of the markets, the investment adviser said.

"It's for investors who think the S&P 500 is going to be trading within a range that's around where it is now for the next six to 12 months," the adviser said. "They could also be tempting for investors who are not sure about where the market is heading over the next year but they want a chance to get a positive return whether the market is up or down, although for these investors they might be better off getting a principal-protected product."

The notes essentially allow investors to outperform the S&P 500 as long as the index finishes between 90% and the return cap, the adviser explained.

"What they're offering is an alternative to a direct investment in the S&P 500 where the investor can do better than the index as long as the index doesn't go outside of a certain range," the adviser said. "So if you think the S&P 500 is going to do really well and exceed 25-point-something percent over one year you probably shouldn't buy this. If you think it's going to fall by more than 10%, you don't want this. But if you think it's going to be range-bound, this beats buying a SPDR or some other index fund."

Price for protection

The dual directional feature, however, comes with a cost, the adviser noted.

Credit Suisse is also offering buffered return enhanced notes due March 17, 2010 linked to the S&P 500 via JPMorgan.

The single-direction notes will also pay double any index gain, and they have a buffer that protects against capital loss for up to a 10% decline in the index. Investors will still lose 1.1111% for every 1% that the index declines beyond 10%.

The maximum total payout for the notes will be at least 28.86%. The exact cap will be set at pricing.

"That's your answer about how much this costs," the adviser said. "Giving you that absolute return on 10% of the downside, you lose about 300 basis points on your maximum upside."

The adviser said the price of the feature seemed reasonable, but stressed that it made the most sense for investors who actually have a view of a range-bound S&P 500, rather than investors who do not know where the index is headed.

"This isn't a way to make money when you don't know what's going to happen to the index," the adviser said. "You do have a particular view of the S&P 500 in this product, specifically it's going to be between 90% and whatever the cap is at maturity. If you don't have a clue where the S&P 500 is going to be at maturity, you shouldn't be buying something like this, especially since your principal isn't protected. Buy a CD instead or do more research."

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