Credit Suisse links accelerated notes to equity benchmarks; product appeals to recovery fans, adviser says

By Kenneth Lim

Boston, Nov. 19 - Credit Suisse's planned accelerated notes linked to a basket of U.S. equity benchmarks could attract investors who expect the stock markets to hit bottom soon, an investment adviser said.

Credit Suisse, through its Nassau Branch, plans to price zero-coupon Buffered Accelerated Return Equity Securities due May 11, 2012 linked to a basket of equity benchmarks.

The basket comprises a 50% weighting in the S&P 500 index, a 30% weighting in the MidCap SPDR Trust Series 1 fund and a 20% weighting in the Russell 2000 index.

At maturity, investors will receive par plus 130% of the underlying basket return, subject to a basket return cap of 90% to 110%. The return cap will be set at pricing. If the final basket level declines, but it has not dropped by more than 15%, investors will receive par. Investors will lose 1% of their principal for every 1% that the final basket level declines beyond 15%.

High cap, leverage

The product has an attractive return cap given that it also offers a leveraged return, the adviser said.

"What I like is that it gives you upside participation of 130% and what looks like a reasonable cap," the adviser said. "You hit the cap if the market goes up by about 20% every year, assuming it goes up every year, which is quite reasonable."

The cap naturally appears high, but that is because of the length of the product, the adviser said.

"If you just look at it, yes, 90%-110% is much higher than most of the other stuff you see," the adviser explained. "But that's because this is over 3.5 years. The longer the term, the higher the cap has to be to make it attractive, because otherwise there's a greater chance of underperformance, and investors would rather just invest directly in the basket."

Notes reward earlier recovery

The notes would attract investors who believe that the equity markets are due for a recovery soon, the adviser said.

"The basket is designed, I think, to reflect the performance of the entire U.S. equity markets, so not just the large caps or the small caps but all of them," the adviser said.

The earlier the recovery in the U.S. markets, the better it is for investors, the adviser said.

"Just because it's a bullish product," the adviser said. "But I think it's also because you're eventually going to compare the ending value of the basket against the starting value. So if the market hasn't hit bottom, what's going to happen is the basket's value is going to fall below its initial level. Let's say the markets only hit bottom after one year. Then you only have 2.5 years left to not just crawl out of that one-year hole but also go above your starting point so that you can actually make a decent return on this product. Obviously the 130% leverage helps there, but that's only if you end up above the starting level."

Underperformance, capital risks

Investors could risk losing their capital if the U.S. equity markets are underwater at the end of the notes, the adviser added.

"It's not principal protected, and it's quite a long product, so investors take on quite a bit of risk that if they made the wrong prediction they could lose some of their principal," the adviser said.

There is also a risk of underperformance, although that risk is much smaller compared to the danger of losing capital, the adviser said.

"You could underperform the stock market if it goes up much faster, but I think that's not the greatest risk for the investor," the adviser said. "The capital risk is the more important one here."

Investors could also take a loss of the issuer defaults.

"Issuer risk is still one of the topmost issues for investors right now," the adviser said. "Some of the weaker issuers obviously are no longer in the picture, but remember that at the bottom of all the uncertainty that's making investors nervous is the health of these banks."

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