Credit Suisse offers straddle notes tied to EM ETF; Alpha Natural-linked notes have high risk

By Sheri Kasprzak

New York, May 10 - Credit Suisse AG, Nassau Branch intends to hit the market with a rather uncommon structure, two-year straddle-structured notes.

The absolute return barrier securities are linked to the iShares MSCI Emerging Markets index fund.

The notes feature 100% upside participation with a 20% maximum return. On the downside, investors will receive the absolute value of any decline unless the fund breaches the 71.5% to 73.5% downside barrier during the life of the notes, in which case investors will lose 1% for every 1% that the final share price is less than the initial share price. The notes are due May 27, 2015, and pricing is expected on May 21.

The structure, said Suzi Hampson, head of research for Future Value Consultants, offers investors dual-directional growth.

Straddle-structured notes are not particularly common, and they crop up from time to time depending upon market conditions, said Hampson.

"The payoff type is not common," Hampson said in an interview.

Barrier

For these particular notes, there is a 26.5% to 28.5% downside barrier for the life of the two-year notes.

"The barrier is throughout the life, which is a bit more risky," Hampson said.

"As far as the underlying is concerned, if you were unsure about its performance as a fund, or if you had a mixed view as to how this was going to perform, for instance if you didn't think it would return more than 10% a year, a product like this might give you more comfort. You can participate in growth in either direction."

This is a product, she said, for an investor who is comfortable taking the cap in exchange for a higher return at maturity.

"It wouldn't be suitable for a bullish or cautious investor," she noted.

Alpha Natural notes 'risky'

Looking to notes priced during the week, UBS AG, London Branch hit the market with $105,000 of 10.26% annualized airbag yield optimization notes linked to the stock of Alpha Natural Resources Inc.

The reverse convertible notes have a riskmap score of 10 out of 10 from Future Value Consultants, said Hampson. The higher the riskmap, the higher the risk of the product.

"It's a terrible score," Hampson said.

The notes, which are due Nov. 13, 2013, pay par at maturity unless the final share price is less than the conversion price, in which case the payout will be a number of Alpha Natural Resources shares equal to $1,000 divided by the conversion price. The conversion price is 75% of the initial share price.

"The riskmap looks at the probability of capital loss," Hampson said Friday.

"In this case, there's a high chance you're going to lose some capital."

In order to lose capital in this offering, the 75% barrier must be breached, which indicates that the underlying stock is highly volatile, Hampson said.

Volatility for the stock over a one-year period is in the low 70s, around 72 or 73, she said.

"Over a given period, say a year, the barrier of 75% only needs a 25% fall to breach [the barrier]," she said.

"With volatility in the 70s, it does suggest a high chance of being breached. It also has a low price score. You don't get a low price score for just being a risky product. You also need a higher coupon to compensate for the risk you're taking."

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