Credit Suisse’s notes tied to Euro Stoxx 50 aimed at Euro bulls seeking to mitigate risk

By Emma Trincal

New York, Dec. 8 – Credit Suisse AG’s market-linked notes due Dec. 31, 2020 tied to the Euro Stoxx 50 index are likely to appeal to cautiously bullish investors seeking exposure to European stocks given the protection offered and the nature of the risks associated with this part of the world, sources said.

If the index return is positive, the payout at maturity will be par plus 110% to 120% of the index return, with the exact participation rate to be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls by up to 10%, the payout will be par plus the index return, with exposure to the index decline. If the index falls by more than 10%, investors will receive 90% of par.

The European Dow

Carl Kunhardt, wealth adviser at Quest Capital Management, said that the structure offered a convenient way to diversify an equity portfolio across different regions in the world.

“It’s a little bit long but it’s a nice note,” he said.

“You have to be international in a well-diversified portfolio. You can’t just go all domestic equity.

“The closest thing is Western Europe, and the Euro Stoxx is the Dow over there. These are 50 mega stocks. You’re investing in a Dow strategy is Europe. It makes plenty of sense.”

But the defensive aspect of the structure, with losses capped at 10%, was what made the product stand out.

“They offer an interesting play on the buffer. You take the first losses but you can’t lose more than 10%. You get a true safety net below you,” he said.

“On the upside, you’re not getting the dividends but you participate in the index on day one, up to the max. That’s attractive too.

“You get 100% of the gains, 10% of the losses; what’s not to like?”

Risk mitigation

How to achieve global diversification while mitigating risks is one of the baffling issues faced by U.S. portfolio managers after six years of a strong domestic rally, he explained.

“There is no question that any portfolio should have some allocation to European stocks in order to get the international diversification that any equity portfolio needs to have. But one of the issues with Europe is that it tends to be more volatile than the U.S.,” he said.

“This note gives me full participation in the upside. And if there’s a meltdown, I have limited exposure. When people know in advance that the maximum they can lose is 10%, they are totally comfortable. If the market is down 10%, they lose 10%. But if it’s down 40%, they don’t lose 30%. They lost 10%. That’s neat,” he said.

Risk-reward

Kirk Chisholm, principal and wealth manager at NUA Advisors, said he is not bullish about the asset class. But the structure, he noted, offered enough protection to accommodate investors who hold a bullish view on Europe but who remain cautious.

“I’m not a big fan of European stocks right now, given that a number of European economies are in recession and that we have those unresolved issues around Russia and Ukraine,” said Chisholm.

“But if you have to invest in Europe, that’s maybe a good way to do it.

“If I was considering an ETF, this note would probably be a better solution. You’re getting an additional 10% on the return of the index. Your upside is not capped. But your downside can’t exceed 10%.

“It’s a better risk-reward setup than buying the index,” he said.

Russia an issue

The situation in Europe is mixed at the moment with positive developments and serious geopolitical risks, he said.

“Some things could go very wrong in Russia. If history tells us anything, it’s that you have to be very careful about this part of the world. Europe may be an opportunity in six years, but in the meantime, it’s a risky bet,” he said.

“On the positive side, the euro has dropped quite a lot, which should help the economies of the euro zone. That’s good but I don’t’ think we’ll feel the benefit of the currency decline right away. I think it will take at least a year before it starts to have a positive impact on the economy,” he said.

The upside gives investors an additional 10% in return but they also lose a 3.25% annual dividend yield for six years, so slightly less than 20%, he said.

“You would get the 20% with the index no matter what, while you’re not getting it with the notes. Obviously you’re not getting the same risk-reward profile. The terms of the notes are not the same as a direct investment in the equity.

“But given that Europe, in my view, could easily spiral out of control, having this 90% principal guarantee make the product relatively attractive and the partial loss of dividends somewhat more acceptable.

“Europe is relatively cheap but so is Russia. The notes won’t penalize your upside if the situation improves and you get a good downside protection.

“It’s a pretty reasonable investment if you consider allocating to Europe while limiting your downside exposure,” he said.

The notes will price Dec. 29 and settle Dec. 31.

The Cusip number is 22547QZ66.

UBS Financial Services Inc. will act as distributor.

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