Credit Suisse prices top deal of year so far, $260.29 million step-up notes tied to Euro Stoxx

By Emma Trincal

New York, April 29 - Credit Suisse AG, London Branch priced the largest structured note offering so far this year with its $260.29 million of market-linked step-up notes due June 26, 2015 linked to the Euro Stoxx 50 index, according to data compiled by Prospect News.

BofA Merrill Lynch was the agent.

If the index finishes above the step-up value - 112.9% of the initial level - the payout at maturity will be par plus the index gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes at or below the step-up level but at or above the initial level, the payout will be par plus the step-up return of 12.9%.

Investors will be exposed to any losses if the index finishes below the initial level.

Sources said that the bid was strong because the offering combined a sound structure with Europe, one of the most popular investment themes.

The issuer's credit was also seen as attractive. The credit rating for Credit Suisse is A.

In-house research

"We're seeing a lot of Credit Suisse and HSBC issues sold by Bank of America. I don't have the breakdown, but both issuers have been pretty active," a sellsider said.

"My experience is that for each firm, whether you talk about Merrill Lynch, Morgan Stanley or Credit Suisse, each has its own way to show a deal. Often they come out with a deal that marries the structure with an in-house view, and it can have an impact on the bid if the view is popular. That could be the sole reason.

"People tend to focus on themes. They want something tied to a particular sector, or they want a longer lock-up period before it's called. Very often it's difficult to know what makes the deal successful if you're not part of it one way or the other."

Yield and growth

The structure enables investors to capture a digital return of nearly 13% even if the index performance is flat, according to the prospectus. If the index growth is above the 13% step level, the one-to-one upside will let them participate in the index with no cap, which is another attractive feature, sources said.

"I think in this case the structure was a success because it marries yield enhancement and growth. You can get one without sacrificing the other. That's the key. If the index is up only 5%, you'll make 12.9%. And if it's up a lot, you are not capped. That's yield enhancement and growth combined together," the sellsider said.

In exchange for the ability to outperform the index in a moderate-growth scenario and participate in the upside with no cap above the step level, investors had to make concessions, he noted.

"You can't have everything, so they don't offer any downside protection," he said.

"But it's an equity-like risk. You have no downside protection because you also don't have a cap. The cap is the growth component. So you're no worse off than having an ETF. If the ETF went up or down, it would be no different. The difference here is the step payment that you get if the index goes up to a certain degree."

Elliot Noma, founder of Garrett Asset Management, LLC, said the notes enable investors to express a moderately bullish view on the equity market in the euro zone. Given the popularity of this investment theme among investors, the success of the notes was not a surprise. In his view, a lot of the bullish sentiment around Europe derives from central banking.

Central banking put

"It's a note for people slightly bullish on Europe in terms of what the European Central Bank can do," Noma said.

"In some ways, the gap between the economy and the market is similar to what's happening in the U.S.

"Those investors believe that the euro zone equity market will do moderately well, and they don't think the market is going to go down. If the market was to go down, the central bank would step in with some aggressive policy. This trade is based on the belief that the central bank will continue to support the market in any way they can."

This would include launching a European version of quantitative easing, he explained, something the ECB has not done yet but would be likely to implement at the least sign of a market downturn.

Market, economy

Because European economies are still slowly recovering and the ECB signaled that it would support the market by an accommodative policy, the timing of the notes may be attractive for investors looking for investment opportunities outside of the United States.

"First, the ECB has made it clear that they will support the market. Next, if the European economies were to do very well, you could see the ECB stepping on the brakes because they don't want the risk of overheating. The end of a stimulus could at first hurt the market. Look at what happened in the U.S. when the Fed announced that QE would be phased out. The market took a hit first but then recovered because overall, the end of QE is the equivalent of the Fed saying the economy is doing better," he said.

"That's when the 14-month duration of this deal comes into play," he said, adding that the short-term maturity is helpful.

"The ECB has not even launched its own QE yet. We're far from the phasing out turbulence seen over the past year in the U.S.," he said.

Foregoing dividends

"This is a short-term bet for people who believe that the market in Europe will be supported by its central bank as it has been the case here in the U.S.," he said.

"Investors get some form of return enhancement, a way to outperform the market if the Euro Stoxx return is modest. That's the bet. To get a 13% return if the index is up only 5%, you have to give up something. They're giving up the dividends."

The dividend yield of the Euro Stoxx 50 is 2.75%. On a 14-month term, investors have to forego about 3.2%.

The second-largest offering of the year so far was also brought to market by Credit Suisse. However, JPMorgan was the distributor. The offering was $225.9 million of 0% return notes due Feb. 25, 2015 linked to the upside return of a basket of three sector indexes and the downside return of the S&P 500 index.

The step-up notes (Cusip: 22545F102) priced on April 24.

The fee was 2%.

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