Credit Suisse links warrants to one-month Libor; retail interest likely limited, adviser says

By Kenneth Lim

Boston, May 27 - Credit Suisse's planned offering of seven-year warrants linked to one-month Libor offers a way to bet on rising interest rates, but it is likely targeted at more sophisticated investors, an investment adviser said.

Credit Suisse, through its Nassau branch, plans to sell the warrants due June 2016 in denominations of $100 at an offering price of $6 per warrant. The underwriter of the deal is Merrill Lynch & Co.

Each month, holders will receive a cash payment per warrant equal to $100 multiplied by an annualized rate equal to one-month Libor minus a strike level, subject to a floor of zero. The strike level is expected to be 3.25% to 4.5% and will be set at pricing.

One-month Libor must exceed the strike level by an average of at least 0.85715% each month in order for the cumulative cash payments to equal at least the original price of the warrants.

Call on Libor

The warrants are effectively call options on short-term Libor, the adviser said.

"You're betting that the rates will go up in the next seven years," the adviser said. "Rates are about as low as they can be right now, so no prizes for guessing where they're headed in the long term."

But because of the strike level, investors will need Libor to not just go up, but go up by a sufficient amount to cross the strike level and then some in order to make a profit, the adviser noted. Investors should therefore be careful about taking the average break-even spread that is stated in the prospectus - about 0.85715% each month - at face value.

"One-month Libor is now about 30 basis points," the adviser said. "You're still way, way below the strike level.

"If they price this in June, chances are at the start you're not going to get anything from this. You need the rate to go up quite fast if you want to start collecting on this early. And those months when you collect nothing on these, you have to think about the opportunity cost. Is my money better spent somewhere else instead of sitting there and waiting for Libor to reach however much my breakeven is going to be?"

Savvy investors only

The product is likely targeted at sophisticated investors, the adviser said.

"I don't expect they'll see a lot of retail investors knocking on the doors trying to buy this," the adviser said.

The barrier for retail investors lies not just in the underlying, which most retail investors do not deal with on a regular basis, but also in the requirement that investors have options-approved accounts, the adviser added.

"It's another hurdle," the adviser said.

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