Credit Suisse’s leveraged notes on Energy Select SPDR offer ‘decent’ structure for sector bet

By Emma Trincal

New York, April 19 – Credit Suisse AG plans to price 0% market-linked notes with leveraged upside participation to a cap and fixed percentage buffered downside due Nov. 3, 2020 linked to the Energy Select Sector SPDR fund, according to a 424B2 filed with the Securities and Exchange Commission.

The payout at maturity will be par plus 150% times any index gain, up to a maximum return of 30% to 35%.

Investors will receive par if the index falls by up to 10% and lose 1% for each 1% decline beyond 10%.

Sector investing

“We usually don’t look at sectors. We invest in the broad market. But this particular one is little bit different,” said Steve Doucette, financial adviser at Proctor Financial.

“Energy hasn’t done much in the past few years, so if you believe in the reversion to the mean concept, it might be a decent play.

“That would be for me the only reason I would look into it since again I stay away from sector-specific bets.”

Wild swings

The underlying fund had two negative years in 2014 and 2015 followed by a strong bullish trend in 2016 with a 28% positive return on that year. But the performance turned flat in 2017 despite a rebound after the summer. This year, the fund has been trading sideways most of the time. But pushed up by the recent rally in oil, the share price has jumped 10% over the last two weeks.

“It’s a very choppy market. Prices can move rapidly,” he noted.

The structure is “decent,” he noted.

“I get 13% a year. That’s a reasonable return on two and a half years and I get the 10% buffer,” he said.

“If the market turns, it might be a good defense rather than being in the FANG. If you’re bullish, it’s not bad with 1.5 times leverage.”

FANG is the acronym for four high-performance technology stocks – Facebook, Amazon, Netflix and Google.

Challenged industry

But Doucette had some concerns about the holdings of the fund and the future of the sector in general.

He noted that two stocks –Exxon Mobile Corp. and Chevron Corp. – made for 40% of the portfolio.

“I’d have to do my due diligence on those guys. Are they just extracting oil or have they begun to make serious investments in renewable energy? Are they ahead of the game?

“I see renewables as a sector disruptor. If those two big oil companies continue to do what they’ve been doing forever without adjusting to new challenges, they could be wiped out like the telecom industry.”

Core holding

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the note was attractive.

“I like the sector. I like the 10% buffer,” he said.

The cap was acceptable over the two and a half year period, he said.

“The sector is range bound with a possibility of a breakthrough to the upside but not substantial enough to be complacent about the protection. This 10% buffer is in line with what we expect for the next couple of years,” he said.

While the 11% to 13% annualized compounded return is generous, a vigorous bull market could bring disappointment to a more bullish investor. Medeiros said he was not concerned about the upside risk however.

“This note seems to be a good way to approach our core holding in the energy sector. If the index was to rise much higher, I could always overweight the notes with something more liquid,” he said.

“The reason I think it’s good for our core holding is because the note gives you a buffer that can really mitigate the downside. I don’t see a huge downside but at least if it’s down 10% the buffer is appealing.”

Wells Fargo Securities, LLC is the agent.

The notes will price on April 30.

The Cusip number is 22550WNC7.

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