Credit Suisse’s leveraged notes linked to MSCI EAFE index offer value, lower risk for bulls

By Emma Trincal

New York, May 29 – Credit Suisse AG, London Branch’s 0% leveraged buffered notes linked to the MSCI EAFE index offer attractive terms for “reasonably” bullish investors, said Tim Vile, structured products analyst at Future Value Consultants.

The notes will mature 23 to 26 months following pricing, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 1.4 times any index gain, subject to a cap that will be between 21.42% and 25.20%. The exact cap will be set at pricing.

Investors will receive par if the index falls by up to 12.5% and will lose 1.14286% for every 1% decline beyond 12.5%.

Terms

“This leverage return note offers several advantages compared to the average similar product,” he said.

“It’s relatively short term, it has a buffer, and both the cap and the leverage factor are decent for a modestly bullish investor.

“With the 1.4 times leverage and a 23.31% cap, not much growth is required from this index. Your maximum return on a compounded annualized basis is 11.53%. That means with an index up only 8.35% a year you can achieve the cap. It’s not terribly ambitious.”

To run his research report, Vile picked a 23.31% cap, which corresponds to the mid-point within the announced range. The 23-month maturity was determined based on the lower end of the range.

“On the downside, you get a hard buffer: as long as the index does not drop by more than 12.5%, you get your principal back. There is a gearing, but the first losses are still buffered. The gearing is there to improve pricing. It gives the issuer more money to get a higher cap and enhance the upside.

“Finally, the 1.4 times participation is not bad. All these features give someone with a mildly bullish outlook a lot to like.”

A more bullish investor would not use this structure because the cap is designed for a modest rise in the index, he said.

“Real bullish investors would want no cap or a higher cap. They may also choose a lower participation rate and would be likely to give up some of the buffer amount in order to achieve that goal,” he said.

“But for many investors, getting a good protection, 1.4 times leverage on the upside and a decent cap for a two-year term is kind of interesting.”

The index has a one-year implied volatility of about 16%.

“It’s enough to give you an attractive cap. Making more than 11% a year is a decent return. At the same time, it’s only slightly higher than the S&P 500, not higher to the point of elevating risk in a meaningful way, which is evidenced by the riskmap.”

Risk

Future Value Consultants assesses the risk associated with a product by adding two risk components, market risk and credit risk. The resulting riskmap measures risk on a scale of zero to 10 with 10 as the highest level of risk possible.

The notes have a 1.45 market riskmap versus an average score of 3.12 for products of the same type.

“Market risk is very low. That’s the 12.5% buffer plus the fact that volatility is not excessively high compared to the S&P,” he said.

The credit risk is also “low,” he said, pointing to a credit riskmap of 0.43 versus 0.56 for the average in the category.

“That’s because we have a relatively short tenor compared to the average leveraged return product.”

As a result, the product has a 1.88 riskmap versus 3.68 for the average of its peers.

“We end up with a very good riskmap nearly half the average of the product type. The buffer really helps on the market risk side and the credit risk too,” he said.

Return score

Future Value Consultants measures the risk-adjusted return with its return score. The rating is calculated using five key market assumptions: neutral assumption, bull and bear markets and high- and low-volatility environments. The bullish scenario is the one used for the computation of the score, which is 7.48 versus a 7.79 average return score for the product type.

“It’s slightly less than average but not by much. On the one hand, the low riskmap helps the risk-adjusted return, obviously. On the other hand, the cap is hindering the score,” he said.

“This reflects the purpose of the product. The index is not supposed to rise very much. If it goes up more than the cap, it won’t be the ideal product.

“The product competes with other leveraged return notes that have either a higher cap or no cap at all, so the cap here contributes to bringing down the score.”

Price score

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10. This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

At 8.55, the price score exceeds the 7.19 average for the product category.

“It prices very well, especially for a short-term product,” he said.

Fees are computed per annum. As a result, the cost is spread over a shorter period of time.

“In general it pushes down your price score, but you don’t even have that here,” he said.

“Despite the negative impact of a short maturity, we still end up with a very high price score. It suggests that the issuer spent enough on the options. The participation and the cap look reasonable. The notes offer good value to investors, according to this rating.”

Overall score

The overall score measures Future Value Consultants’ general opinion on the quality of a deal. The score is the average of the price score and the return score.

The overall score is 8.01 versus an average of 7.49 for similar products and 7.13 for all products.

“It’s about half a point higher than the average for this category of products,” he said.

“You’re getting more than 11% a year. Depending on how ambitious the investor is, it’s still a decent return, especially with the buffer on a short-term note.

“It’s a very strong leveraged return note but also a strong product. It scores better than the average for all products. It should appeal to a variety of bulls with moderate market growth expectations.”

Credit Suisse Securities (USA) LLC is the agent.

The notes (Cusip: 22546VE85) were expected to price Thursday.

© 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.