Credit Suisse’s Ares tied to SPDR S&P Metals and Mining ETF offer bullish sector bet

By Emma Trincal

New York, May 11 – Credit Suisse AG, London Branch plans to price 0% Accelerated Return Equity Securities due June 26, 2018 linked to the SPDR S&P Metals and Mining exchange-traded fund, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus about 200% of any fund gain, with the exact participation rate to be set at pricing, subject to a maximum payout of 30%.

“If you believe in that sector it’s a nice bullish play. You’re obviously bullish on the index,” said Steve Doucette, financial adviser at Proctor Financial.

“A cap of 30% isn’t bad. You need 15% upside to cap it out.”

Equity sector play

The underlying fund tracks the metals and mining sub-industry portion of the S&P total market index.

The holdings of the fund include gold companies such as Royal Gold Inc. and Newmont Mining Corp. for instance as well as silver miner such as Coeur Mining Inc., steel producers such as Steel Dynamics Inc. and other metals companies.

“It’s an equity fund. It gives some sort of indirect commodity exposure without having to deal with futures,” Doucette said.

“I’d have to revisit the index. Is it going to go down? If it is you’re long the index on the downside,” he added.

The ETF has dropped 5.5% this year but has gained 31% over the past year.

Leverage, correlation

Having no downside protection is always a red flag, but at least the upside potential was attractive, he said.

One way to reduce the risk would be to invest a smaller portion of the portfolio, for instance half of a desired position size.

“Obviously that’s a decision you’d have to make. Do I want to reduce the size of my investment by 50% to get less downside exposure? You get half the risk but half the return. Meanwhile the cash you leave aside is not working for you.”

Another factor that may help with the overall risk of the portfolio was diversification.

“The beauty of metals or commodities in general is that it’s not correlated to the market,” he said. “Because of that and even though there’s no buffer, I may not be that much worried about a correction.

“In any event, the premise of this note is bullish. You can’t be worried about the downside when you buy something like this.”

Pick and choose

A market participant said the note was structured for investors who “don’t care about downside protection at all.”

The note was designed to outperform the underlying if the fund finished below the cap.

“There’s no way to wiggle it. It has no protection because you can’t have everything,” he said.

“Anytime you change an item in your favor, it’s going to cost you.

“The issuer can’t give you two times leverage, a 30% cap plus a buffer on a one-year note. They can’t do that.”

This market participant however said he did not like the product. He mainly uses structured notes first for the protection.

“It doesn’t mean it’s a bad note. People do a lot of things for a lot of different reasons,” he said.

“Obviously on this one, people feel there is no chance the underlying could go down or if they do, they believe it’s worth taking the risk.”

Not enough upside

Brian Rettig, portfolio manager at the Institute for Wealth Management, was more focused on the cap. He did not believe the risk-adjusted return offered much appeal.

From its high in February the SPDR S&P Metals and Mining ETF price has dropped nearly 20%, he said.

“If I think the market is going up, I’d rather buy the ETF.

“Why would you buy the notes, lock it out for 13 months if you’re only getting 30% up with no downside protection?”

With the share price currently trading almost 20% lower than its high two months ago, getting back to even was a likely outcome in the course of 13 month, at least for a relatively bullish investor, he explained.

“If you came back to the high you’d be up 20%. That’s pretty close to 30% and you’re not locked up for 13 months,” he said.

“You’re not gaining much by being locked in, there’s no protection and it’s kind of a speculative play anyway.”

Ramping up

The structure would look more attractive with a higher cap.

If the product is bullish, investors would have to make the assumption that touching the previous two-month old high is achievable.

“That means you expect a gain of at least 20%, which translates into a minimum cap of 40% with the leverage,” he said.

“A 40% or 50% cap would look more attractive to me. This would just mean getting back to the previous high in more time.”

Whether the share price would return to its previous peak soon or not depended on the investor’s view.

But someone willing to give up both the liquidity and the downside protection for over a year should be sufficiently bullish to make that call, he said.

Investors will lose 1% for every 1% decline in the fund.

Credit Suisse Securities (USA) LLC is the agent.

The notes (Cusip: 22550B4F7) will price on May 19 and settle on May 26.

© 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.