Credit Suisse’s absolute return buffered notes on EAFE, EEM offer safer bet on foreign markets

By Emma Trincal

New York, March 31 – Credit Suisse AG, London Branch’s 0% absolute return buffered securities due April 2, 2024 linked to the lowest performing of the iShares MSCI EAFE exchange-traded fund and the iShares MSCI Emerging Markets ETF are designed for mildly bullish investors seeking a conservative exposure to international equity markets, sources said.

The combination of a hard buffer and absolute return payout allow investors to access this asset class in a more defensive way, they noted.

If each ETF finishes at or above its initial level, the payout at maturity will be par plus the return of the worse performing fund, capped at par plus 45%, according to a 424B2 filing with the Securities and Exchange Commission.

If either ETF falls but neither falls by more than 20%, the payout will be par plus the absolute value of the return of the worse performing index.

Otherwise, investors will lose 1% for each 1% decline of the least performing index beyond the 20% buffer.

Hedging

Tom Balcom, founder of 1650 Wealth Management, said he liked the structure.

“You have a cap and no upside leverage, but the downside protection and the absolute return are what you’re looking for here,” he said.

“This is a hedge. That’s why you’re giving up some of the upside. It’s a trade-off.

“If you’re looking for a long exposure, you just buy the ETFs directly. The whole idea here is to limit the losses, to mitigate the downside risk.”

Investors sacrificed more in terms of leverage than in pure upside as the cap is set at a “very decent” level, he said.

“15% a year is quite high for a cap,” he said.

Too rare

“On the downside, if there’s a pullback of 20% or less, you can outperform nicely.

“Whenever you have a worst-of with absolute return, you are in a better position if the market is down because you can get the maximum return if you don’t go beyond the buffer level of course.”

Absolute return deals have not been as common recently as they once were, he noted.

“I’m not so sure why but there are not so many lately, especially with a buffer. Having the hard protection and the absolute return is a nice combination. I like the structure,” he said.

Headline, credit risks

One caveat was Credit Suisse’s press release on Tuesday saying that a “significant U.S.-based hedge fund defaulted on margin calls” made by the bank. The failure of the unnamed hedge fund to meet its margin calls triggered a fire sale. Other lending banks were also involved in the unwinding of the fund’s positions.

The Wall Street Journal on Monday disclosed the name of the hedge fund as Archegos Capital Management, information not yet confirmed by Credit Suisse.

The recent volatility induced by the hedge fund’s failure was concerning enough for Treasury secretary Janet Yellen to bring the issue on Wednesday at a meeting of the Financial Stability Oversight Council with some leading U.S. financial regulators.

The credit markets took notice as well. The cost of insuring debt from Credit Suisse increased recently. A month ago, the five-year credit default swap spread was at 50 basis points. On Monday, it jumped to 65 bps and rose to 72 bps the next day to somewhat stabilize at 71 bps on Wednesday, according to Markit.

UBS AG’s CDS spreads in comparison traded at 34 bps on Wednesday.

“On the positive side, you can say that Credit Suisse’s funding levels are more favorable now,” said Balcom.

“But credit risk is something to always keep in mind.”

Mildly bullish

Marc Premselaar, senior managing director, structured solutions at CAIS, said the notes were in line with a specific view on non-U.S. equity markets.

“It’s for investors who want the exposure to international equities but who have moderate return expectations from this asset class,” he said.

“If all goes well, you get just under 15% per annum. That’s a strong return potential on the upside.

“If one of the ETFs is down, you have a potential absolute return of up to 20%. Below that is the buffer. That’s a nice feature. Having a buffer is more palatable than having a barrier.”

Obviously, the structure was not designed for strongly bullish investors.

“The nice part about structured notes is that you can customize your view. Advisors can mix and match different features in order to fit their client’s needs,” he said.

“If you’re more bullish, you might think of getting rid of the buffer to increase the leverage and possibly remove or raise the cap.

“This particular note is more geared toward conservative clients who have a muted view on international equity markets.”

Credit Suisse Securities (USA) LLC is the agent.

The notes were expected to price on Wednesday and to settle on April 5.

The Cusip number is 22552XHA4.

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