Credit Suisse's $5 million enhanced notes linked to Euro Stoxx 50 offer 5x leverage, high cap

By Emma Trincal

New York, Feb. 28 - Credit Suisse AG, London Branch's $5 million of 0% return enhanced notes due Feb. 26, 2019 linked to the Euro Stoxx 50 index feature unusually high leverage, sources said.

The payout at maturity will be par plus 5 times any index gain, up to a maximum return of 90.25%, and investors are exposed to any losses, according to a 424B2 filing with the Securities and Exchange Commission.

"This is a deal with very high leverage. But it also has a high cap. The combination of both makes it a compelling story. What's the point of having five times leverage if your cap is 10%? Here you have 90%. Investors need only the index to rise by 18% in five years in order to reach the cap. This is a very strong product," said Tim Mortimer, managing director at Future Value Consultants.

High leverage

"If the index finishes at 18%, you get the biggest outperformance with the 90% return," he added.

"But even if the index gain is anywhere between more than 18% and less than 90%, you're still outperforming the index but by less and less, depending on how high the index return is.

"If the index is down, apart from the dividends, your downside is the same as if you were long the index.

"This note gives you the possibility of reaching a 90% return over five years with an index growth of only 3.4% a year.

"It's a considerable amount of leverage. You don't need very much index growth to get a very strong return."

In fact, he noted, the index does not even have to grow by as much as 18%. With compounding, a five-year growth of 13% would be sufficient to enable investors to reach the cap.

Mildly bullish

A very bullish investor would not be interested in the notes, since the maximum return is based on very modest growth assumptions.

"This is designed for a mildly bullish investor. This investor is willing to take the downside risk to capture the high return with a very small index appreciation. It's a five-year product, so over five years, the investor's view is that even if the market declines, you have a good chance of recovery, which is not always the case with short-term notes," he said.

Riskmap

One of the key scores created by Future Value Consultants is its riskmap. The sum of two risk components - market risk and credit risk - the riskmap measures on a scale of zero to 10 the risk associated with a product with 10as the highest level of risk possible.

The product's riskmap of 5.40 is higher than the average of similar products, which is 3.23, according to Future Value Consultants' research report.

This result is due to more elevated market risk rather than credit risk as credit risk is lower than average, Mortimer said.

The 4.87 market riskmap exceeds the 2.59 average score for products of the same type, the report showed.

"While investors' perception may make them predict less market risk due to the length of the product, when you look at the market riskmap itself, you realize that the five-year term does very little to reduce the risk. The actual quantitative possibly of loss is greater than average simply because there is no barrier or buffer while many similar notes have some form of downside protection," he said.

In contrast, the credit riskmap of the notes is 0.52 versus 0.65 for the average in the leveraged return structure type.

"The notes are issued by Credit Suisse, a bank with a strong credit rating, which is why the credit riskmap is not very high compared to average despite the five-year duration," he said.

Return score

Future Value Consultants measures the risk-adjusted return with its return score. The rating is calculated using five key market assumptions: neutral assumption, bull and bear markets and high- and low-volatility environments. A risk-adjusted average return for each assumption set is then calculated. The return score is based on the best of the five scenarios.

The optimal scenario for these notes is bullish. Based on this assumption, the notes show an 8.95 return score, compared with a 7.78 average for products of the same type.

"The return score is very strong compared to 7.78. This is because the structure enables you to massively outperform the index," he said.

"It's not just the five-time leverage. The cap is so high ... most investors if you were to ask them would say they'd be happy with a return of 90%.

"It only takes about 3% of index growth per year to reach the cap. It's pretty attractive."

Pricing

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10.

The 7.97 price score of the notes is greater than 7.71, which is the average price score for products of the same type, according to the report.

This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

"Notes like this one, leveraged products in general, are priced competitively because they're plain vanilla, and as such, it would be apparent if the fees were too high, so they tend to be competitively priced, which is good for investors," he said.

"More complex products, worst of for instance, are not as attractively priced."

Overall score

The overall score measures Future Value Consultants' general opinion on the quality of a deal. The score is simply the average of the price score and the return score.

The overall score for the product is 8.46 versus 7.34 for the average of its peers.

"It scores very well. The product has a clear objective. You can get a strong return in a modest growth scenario. It's a very straightforward structure and a compelling story," he said.

The notes (Cusip: 22547QJL1) priced Feb. 24.

J.P. Morgan Securities LLC and JPMorgan Chase Bank, NA were the placement agents. The fee was 3%.

Another 5x deal

Also on Feb. 24, JPMorgan sold on the behalf of the same issuer a very similar product, $2.5 million of 0% return enhanced notes due Feb. 26, 2019 linked to the IBEX 35 index.

Similarities in the terms included a 5x leverage factor and full downside exposure. The cap was 92.5%.

The notes (Cusip: 22547QJK3) also carried a 3% fee.

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