Credit Suisse's $41.63 million knock-out notes tied to S&P drew bid from yield chasers, bulls

By Emma Trincal

New York, March 21 - Credit Suisse AG, Nassau Branch priced the largest deal last week, a $41.63 million issue of 0% capped knock-out notes due April 4, 2013 linked to the S&P 500 index. Sources said that demand was strong because the sentiment is very bullish but also because of the high contingent minimum return offered.

The notes give investors a capped return at maturity linked to the performance of the S&P 500 index subject to a contingent minimum return of 7.25%. The cap is 15%, according to a 424B2 filing with the Securities and Exchange Commission

The condition that makes the minimum return available to investors is the absence of a knock-out event, which is defined as a decline of more than 20% in the index from its initial level during the life of the notes.

If a knock-out event does not occur, the payout at maturity will be par plus the index return, subject to the contingent minimum return of 7.25% and the cap of 15%.

If a knock-out event does occur, the payout at maturity will be par plus the index return, with exposure to losses and gains limited to the maximum return of 15%.

Flexible structure

"It's a mix of participation and guaranteed income. That's why people like it," a market participant said.

The 7.25% income, he explained, is guaranteed in the case of the absence of a knock-out event. Investors in the notes are making the bet that the equity benchmark will not drop by more than 20% during the next 12 months, he said. Under this assumption, investors will earn a return comprised between the contingent minimum return and the cap.

The payout gives investors an enhanced return with a fixed payout, which is attractive for those looking for higher yields, he said. If the index were to close between 80% and 107% of the initial level, investors would outperform the benchmark as they would earn the 7.25% return, he explained.

The structure is also flexible, allowing the noteholders to participate in the index's performance on a one-for-one basis for any positive return comprised between the 7.25% minimum contingent return and the 15% maximum return.

Chasing yield

A sellsider said that fixed-income and savvy investors were likely among the strongest bidders.

J.P. Morgan Securities LLC and JPMorgan Chase Bank, NA were the agents.

"It's JPMorgan's private bank. It's slightly more savvy investors because it's the private bank that's selling this," he said.

Investors buying the notes, according to this source, are bullish enough to be willing to give up the downside protection and are mainly focused on getting higher yields.

"This large-sized offering is tied to the bullish momentum we're in," he said. "People are less concerned about the downside."

Yet investors are willing to accept that their return will not exceed the maximum level of 15%, he noted.

"They're still happy to take the cap because rates are so low," he said. "They've seen the S&P 500 go up a lot, and they wonder how much more it can go. So they look at the 7.25% rate and they say it's a reasonable return on the equity. Even if it hit that cap, I'll be happy with it.

"I think the people who bought this deal are fixed-income investors who are moving into equity for higher yields."

Fees were 1%.

The initial index level for the notes is 1,404.17. It was set on Friday.

The Cusip number is 22546TPJ4.

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