Credit Suisse’s uncapped knock-out notes linked to Euro Stoxx 50 target short-term bulls

By Emma Trincal

New York, Feb. 19 – Credit Suisse AG, London Branch’s 0% uncapped knock-out notes due Aug. 23, 2017 linked to the Euro Stoxx 50 index are designed for bullish investors who want unlimited upside over a short time horizon, said Tim Vile, structured products analyst at Future Value Consultants.

The structure is also competitive on the downside as it offers a “decent” amount of protection, he added.

A knock-out event will occur if the index finishes below its initial level by more than the knock-out buffer amount, according to a 424B2 filing with the Securities and Exchange.

The knock-out buffer amount is expected to be 30.4% and will be set at pricing.

If a knock-out event has not occurred, the payout at maturity will be par plus the index return, subject to a minimum payout of par.

If a knock-out event has occurred, investors will be exposed to the decline.

J.P. Morgan Securities LLC is the agent.

Playing it safe, short

“This is a one-to-one on the upside, and your gains are not limited. Obviously, a bullish investor who expects the market to go up a lot would be interested in such product. Leveraged and capped notes tend to be designed for the less bullish investors. This one is for someone who expects solid gains,” said Vile.

Meanwhile the product also offers an attractive contingent protection of slightly more than 30% on the downside.

“It’s interesting isn’t it? The no cap means it’s a bullish note, but they give you a pretty good amount of protection, especially for a short-term note,” he said.

“The combination of the barrier and the uncapped return makes this note a little bit of a hybrid. It’s both aggressive and defensive. The profile would be strongly bullish but cautiously bullish.”

The averaging at the end of the term over the last five closing levels may be neutral.

“I don’t think it will make much difference really. Averaging is over five days, not six months. If the market rallies over several days and then drops, the averaging will bring your level down. But you may benefit from the feature in the opposite scenario too,” he said.

Future Value Consultants scores structured notes based on risk, return and value, then compares the results with other products divided into two groups: the same product type, or notes having the same structure characteristics, and the “all product type” category, which includes all recently rated products in all structure types.

The notes fit into the “unleveraged return” category in Future Value Consultants’ methodology, which includes any note with a 100% upside participation rate.

Risk

For the risk, Future Value Consultants produces its own metric, the riskmap, which measures the risk on a scale of zero to 10 with 10 as the highest level of risk possible. This measure of risk is the sum of two riskmap components, market risk and credit risk, both calculated on the same scale.

At 1.92 the market riskmap is lower than the 2.19 average for the unleveraged return category.

“The strong barrier really helps the score, especially over a short period of time,” he said.

The notes have a 0.38 credit riskmap, nearly half the average for the product type of 0.87.

“Credit Suisse has a reasonable credit, but the main point here is the 18-month term. When you compare this credit risk with two-, three- or four-year notes, you are going to score better as your risk exposure is lower,” he said.

The riskmap, when adding the two components, is 2.29 versus 3.06 for the average of the same product type.

Return

Future Value Consultants measures the risk-adjusted return with its return score.

The return score is computed based on the best among five market scenarios. The score measures the risk-adjusted return of a note on a scale of zero to 10. The assumption used in the model scoring this product is bullish.

The return score is 7.92 versus an average of 8.50 for similar products and 6.94 for all products.

“It’s a surprise here. The return score is relatively low, although we have a low riskmap. With the uncapped upside you would expect a higher score. The absence of leverage is not really a factor as we’re comparing this product with its peers, which by definition are also unleveraged. I assume the main factor here is the short duration. Eighteen months doesn’t really give investors enough time to compound high returns, especially when you compare this with three-, four- or five-year notes,” he said.

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.

The notes have an 8.57 price score versus an average of 8.18 for the product type.

“This is quite good considering the short term of the notes. On a short-term product, there is less time to amortize the fees. One must assume that the product was relatively well priced given the negative impact of the duration. It’s still average, which is good,” he said.

“The issuer offered good value by providing a 70% barrier and no cap on an 18-month trade.”

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 notes have an 8.25 overall score versus an 8.34 average for the product type and 6.71 for all product types.

“If you consider that the index has already dropped more than 20% from its high, this note offers a good opportunity if you’re confident the asset class will recover. It would be a decent play for a short-term bull who wants to take advantage of the lower entry point while retaining some level of safety on the downside.”

The notes (Cusip: 22546VX76) are expected to settle on Feb. 24.

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