Credit Suisse's $52.67 million notes tied to Euro Stoxx 50 show heavy bid can carry higher fee

By Emma Trincal

New York, March 13 - The size of last week's largest deal - Credit Suisse AG, Nassau Branch's $52.67 million of 0% enhanced participation equity securities due July 1, 2015 linked to the Euro Stoxx 50 index - did not surprise market participants.

The structure of the notes was simple.

The payout at maturity was par plus 213% of any index gain, with investors sharing in any losses. The fees were 2.65%, according to a 424B2 filing with the Securities and Exchange Commission.

"It's a classical performance certificate," a market participant said.

"What's more surprising is the two year and four months maturity and the fees."

The use of the index offered some pricing advantages, he said, given the 3% dividend yield of the Euro Stoxx 50.

"This product makes absolute sense. The 2.65% fee in my opinion is a lot, but that aside, it makes sense because the dividend is high so you can offer some attractive upside," he said.

Dividend stream

The July 1 maturity was a bit odd, he said, but probably justified by the dividend cycle.

"Most stock constituents of the Euro Stoxx pay dividends between March and the end of May. Sometimes, a company will delay dividend payments for one week or two, pushing back the date from the beginning of June to the beginning of July. That's probably why they put a July 1 maturity, as a safety net for traders if companies are late in paying dividends. That way, the payout will still occur before maturity," he said.

To offer leverage, the issuer needs to buy call options on the underlying index. A high-yielding index gives the structurer more purchasing power, he explained. In comparison, the yield on the S&P 500 is 2%.

"The more dividends you include in a product, the lower the forward will be and the cheaper the call is going to be," he said.

"The Euro Stoxx pays a high dividend because it comprises high-yielding telecom and utilities companies, which are heavily weighted in the index and pay a lot of dividends.

"The two-year-plus duration is also helpful. The longer you go in the future the more uncertain the dividend is. If there is a huge dividend growth, the forward will become cheaper because you imply a higher dividend in the future and a lower stock price.

"Another positive factor in using this index is that the downward sloping dividend curve of the Euro Stoxx has been slowly going up and is now flattening.

"The uncertainty on the European dividend streams remains, and the uncertainty makes the forward go down in price."

Fees

While the notes may provide an alternative to a direct leveraged bet on the exchange-traded fund, the notes and the ETF are two distinct products, he said.

"Unlike the notes, the ETF would apply the leverage both on the upside and on the downside," he said.

"I'm not sure that the asymmetrical leverage in the notes makes necessarily the product better than the ETF. It depends on the market.

"In the ETF, you get the dividend payout, and here you don't.

"If the index stagnates and you hold the notes, you don't use your calls and you lose your dividends."

The most surprising aspect of the deal for this market participant was the level of fees.

"Two point sixty five percent! That's astronomical!" he said.

"I'm not in my office, but I have a gut feeling that with that, you could increase the leverage to 300%.

"It feels like it's highly priced."

The average fee on the 22 leveraged notes that priced last week was just under 1%. The 2.65% fee was the highest in a range starting at 25 basis points, according to data compiled by Prospect News.

"What's even more amazing is that nobody else like JPMorgan, Bank of America or Citi would have tried to mimic the product and the fee structure," the market participant said.

"I'm very surprised that none of the competitors were working on replicating the same thing. It's not that difficult. I can structure this within an hour. I just need to be at my desk.

"My guess is that you're going to see the same product soon. If they see that they can gather $53 million with almost 3% in fees, you're obviously going to see more of this."

Popular underlying

On Friday, Credit Suisse priced $14.23 million of buffered digital notes due June 26, 2014 linked to the Euro Stoxx 50 index and the performance of the euro relative to the dollar, according to a 424B2 filing with the Securities and Exchange Commission.

The same day, HSBC USA Inc. priced $5.04 million of 0% knock-out buffer notes due Sept. 10, 2014 linked to the Euro Stoxx 50 and sold by JPMorgan.

The other Euro Stoxx 50-based deal to price last week was a $1 million offering of one-year buffered notes sold by JPMorgan on the behalf of UBS AG, London Branch on Tuesday.

The fees for those deals were 1.2%, 1.25% and 0.8%, respectively.

This week on Monday, Deutsche Bank AG, London Branch priced $10 million of 0% trigger phoenix autocallable optimization securities due March 17, 2016 linked to the Euro Stoxx 50. They were sold by UBS Financial Services Inc. The fee was 1.57%.

Looking at the size of both the deal and the fee for Credit Suisse's $52.67 million offering, Guy Gregoire, former syndicate manager at Pershing, said, "I'm going to guess that it's retail. It's purely a guess, but the size indicates it was not a one-off or a particular customer, although there could have been a lead order built on it. The 2.65% fee tells me that it's not institution based. It's more likely to be transaction-based retail."

The Euro Stoxx 50 is down 1.5% year to date, but the index saw its price rally by 4.7% over the past two weeks.

Gregoire said that it would make sense for some investors to have a positive view on the index.

"If you're looking at a two-to-one with no cap, no downside protection in a two-year structure, you're making a significant bullish statement on the underlying. It's very bullish," he said.

"The Euro Stoxx index has been a fairly popular underlying so far this year."

The notes (Cusip: 22546T2Z3) priced on March 4.

Credit Suisse Securities (USA) LLC was the agent.

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