Credit Suisse’s three-year trigger gears tied to Euro Stoxx 50 offer bullish exposure, high cap

By Emma Trincal

New York, Dec. 22 – Credit Suisse AG, London Branch’s 0% capped trigger gears due Dec. 31, 2019 linked to the Euro Stoxx 50 index offer an attractive risk-adjusted return with a “high” cap and barrier protection, a buysider said.

The payout at maturity will be par of $10 plus double any index gain, up to a maximum return of 69.5% to 73.5%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 30% and will be fully exposed to any losses if the index finishes below the 70% trigger level.

High cap

The annualized cap is comprised between 19.25% and 20.15% on a compounded basis.

“Twenty percent annualized...The chances of underperforming the index are very slim,” this buysider said.

“This is a very high cap.”

Balcom said the issuer was probably able to price such an attractive cap because the eurozone benchmark pays a high-yielding dividend of 3.70%.”

Since note holders do not receive dividends, they forego approximately 11% worth of return over the life of the securities when investing in the notes.

“There’s a great chance that the issuer was able to price the 20% cap simply because the yield is so high,” he said.

“Still, if there is price appreciation over the next three years, the leverage has the potential to offsets the loss of dividends depending on how much return you get.”

Laggard

The Euro Stoxx 50 index has shown a very sluggish performance over the past few years. It has underperformed the S&P 500 index for the past five years.

So far this year, the Euro Stoxx 50 is down about 5% while the S&P 500 has gained more than 12%.

Yet this buysider said he is bullish on the index.

“I like the Euro Stoxx. Returns have been modest. But that’s when the leverage can magnify the performance,” he said.

Investors may be concerned about the slow returns or even fear a pull back.

“But that’s when the 30% barrier gives you a protective edge,” he said.

This buysider said the index is undervalued and could rebound. Its components are major international blue chip companies based in Europe.

“For someone who wants exposure to the Euro Stoxx, this note is a great play,” he said. “It gives you the access, the leverage and the protection.

“We do have exposure to this asset class. When you pull out the chart of the Euro Stoxx versus the S&P, you can easily see why any investor should have exposure to this index for the next three years.”

Headwinds

Andy Valentine Pool, main trader at Regatta Research & Money Management, said he was among those who remain cautious about the eurozone as the region is still facing a number of headwinds.

“We’ve been avoiding it for the political risks,” he said.

“We’ve had Brexit, which is not fully resolved. What about other countries leaving the Union as well? How will it affect the structured notes?”

Among countries posing a risk are France, which holds its national elections next year as well as Italy, which is struggling with a severe banking crisis.

The new policies of president-elect Donald Trump also may introduce a level of uncertainty in terms of trade and exchange rates fluctuations.

“What would be the impact for them of a strong U.S. economy or a strong dollar? The reality will set in in three to six months, but right now the political risks suggest it’s best to be cautious.”

UBS Financial Services Inc. and Credit Suisse Securities (USA) LLC are the underwriters.

The notes will price on Dec. 28 and settle on Dec. 30.

The Cusip number is 22548T760.

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