Credit Suisse’s absolute return barrier securities on Russell, S&P to be used as ‘repair’ strategy

By Emma Trincal

New York, April 7 – Credit Suisse AG, London Branch’s 0% absolute return barrier securities due April 13, 2023 linked to the Russell 2000 index and the S&P 500 index offer protection, absolute return along with uncapped returns on the upside, allowing bulls and cautious investors alike to participate in a recovery, advisers said.

If each index finishes at or above the initial level, the payout at maturity will be par plus 1.35 times the gain of the worse performing index, according to a 424B2 filing with the Securities and Exchange Commission.

If each index finishes at or above the 85% knock-in level, the payout will be par plus the absolute value of the worse performing index.

Otherwise, investors will be fully exposed to the loss of the worse performing index.

Getting past the losses

“We’re interested in using a recovery strategy for our clients right now. It’s our priority,” said Tom Balcom, founder of 1650 Wealth Management.

“The downside protection is more relevant when the market is overvalued. But it’s not the case anymore.”

The Russell 2000 index is still down about 35% from its August 2018 high, he noted.

The S&P 500 index after shedding 35% between its Feb. 19 high and March 23 low is now 21% lower than its high.

“I’d rather have a smaller protection or even one-to-one on the downside. We already had a pullback. If I could get more leverage, at least 2x rather than a barrier, it would be a more efficient payout for me,” he said.

“Now is the time to recover from the lows.

“We want to repair our clients’ portfolios.”

On a shorter-dated note, combining absolute return and barrier protection may be more appropriate.

“You should protect yourself for the next few months. We could have short rallies followed by some declines.

“But this is a three-year note, not a three-month. We’re still very near the lows. You want to get as much leverage as possible,” he said.

A big plus

Donald McCoy, financial adviser at Planners Financial Services, said the notes offered a fair balance between the upside potential and the protection on the downside.

The current market offered a margin a safety.

“You’re already buying into a significant sell-off,” he said. Even if the market rallied recently, both indexes have seen a significant decline in the past five weeks, he added.

“You have much more assurance not to be down 15% three years from now. You’re even very likely to be positive.

“Your downside risk in definitely lessened,” he said.

But having the barrier and absolute return built into the structure was still “a big plus,” he said.

“The tradeoff is pretty favorable to investors. You’re getting this defensive structure on the downside and I don’t think you’re giving up that much on the upside.”

Correlation, leverage

The exposure to the worst of the two equity indexes was not really a concern.

He offered an example to explain why.

A “bullish investor” would invest 50% in the S&P 500 index and 50% in the Russell 2000. At the end of the term, the S&P for instance would be up 25% and the Russell, 10%. The return would be 17.5%.

With the notes, investors would get 1.35 times the return of the Russell 2000, or 13.5%.

“You’d lose a little but that’s sort of a dramatic example where the S&P would be up 25% whereas the Russell would only rise by 10%.

“While the S&P has often outperformed the Russell, there is still a fair degree of correlation between the two, so I don’t really have a problem with the worst-of.”

The leverage offered another advantage.

“The booster replaces whatever dividends you might be giving up.”

Overall, McCoy found the product relatively appealing.

“There is a little bit of moving parts you have to pay attention but it’s not terribly complex,” he said.

“You have the absolute return plus the 15% barrier. On the upside there is no cap and this booster.

“It’s actually a pretty attractive offering.”

Credit Suisse Securities (USA) LLC is the agent.

The notes will price on April 8.

The Cusip number is 22551NXR2.

© 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.