Credit Suisse’s $2.93 million gears on Emerging Markets index offer ‘decent’ cap, adviser says

By Emma Trincal

New York, Feb. 1 – Credit Suisse AG, London Branch’s $2.93 million of 0% capped trigger gears due Jan. 31, 2025 linked to the MSCI Emerging Markets index provide an attractive risk-adjusted return, according to advisers, who said the cap was commensurate with the risk and the amount of downside protection.

The payout at maturity will be par of $10 plus double any index gain, up to a maximum gain of 40.25%, according to a 424B2 filing with the Securities and Exchange Commission.

The annualized cap on a compounded basis is 11.94%.

Investors will receive par if the index falls by up to 25% and will be fully exposed to any losses if the index finishes below the 75% downside threshold level.

Cap

Tom Balcom, founder of 1650 Wealth Management, said he could use the notes as part of his hedging strategy.

“The index is already down 16% from its 52-week high of a year ago. Add to that the 25% barrier. That’s a 40% downside protection from the high,” he said.

The holding period was in line with his goals.

“Our trades are usually three-year notes. If you have a pullback and a nice protection you can recover by the time the notes mature,” he said.

The cap was also appropriate.

“With the 2x leverage capped at 12% a year, you might underperform. But the emerging markets index is a pretty volatile asset class. You’re giving up some of the upside for the downside protection. You still have a nice return. To me, 12% compounded a year is a decent cap,” he said.

The maximum return is also relatively easy to achieve, he noted. A 6.3% annual growth in the index would be enough to maximize the upside.

50% in hedges

Balcom said the product meets the profile of his own holdings. Half of this adviser’s portfolio consists of structured notes.

“Our notes need to have some downside protection because we use them to hedge our long only positions,” he said.

“The hedges vary. They’re not all equal. It depends on the terms and on the market. But we buy the notes for the downside protection, which is why we educate our clients to consider the cap as part of a tradeoff.

“If you’re extremely bullish on the asset class, you buy the ETF. Emerging markets can have impressive gains. But they also have huge swings, so over three years, you’re not guaranteed to have a stunning performance. “With 12% a year, you’re doing pretty well.”

This adviser said he was comfortable with the amount of contingent downside protection as well.

“I like the barrier too. If the index is down 25% you don’t lose a nickel. And you reset the terms at a lower level,” he said.

Downside protection

Donald McCoy, financial adviser at Planners Financial Services, also assessed the value of the cap based on the underlying’s return history. He concluded that even for bullish investors, the cap was enticing.

“Back to the old school category. This is a growth product. You’ve got a pretty substantial downside protection with 2x leverage and a cap,” he said.

“Obviously if you’re bullish you may not want to limit your upside. However, even for bulls, this cap sounds pretty high.

“Emerging market returns can be all over the place. They can go up or down 40%, 35%, 20% on a single year. Over three years, some of the big gains may be offset by some of the big losses.”

With emerging markets, a 25% drop is not implausible, he said.

The barrier can certainly be breached but perhaps not so easily over a three-year term, he added.

The largest drawdown of the index was 28%. going back 10 years ago, according to Morningstar, he noted.

“It was a 28% drop from peak to valley. But it took place over an 18-month period, from September 2014 to February 2016.

“I’m sure if you’re going back 15 years, you would get a bigger number.

“Overall though it seems like you’ve got the downside covered,” he said.

China’s impact

The notes should appeal to investors who do not expect spectacular gains from this asset class, he said.

Since its inception in April 2003, the iShares MSCI Emerging Markets ETF, which tracks the index, posted an annualized return of 10%.

“The index had crazy swings during this period. So, a 12% cap is not a bad return,” he said.

China may significantly impact the index’ return given the country’s weighting of nearly a third of the index.

“China has been a big part of the growth. But in the next three years, its economy is likely to grow at a much slower pace. If that’s the case, the index itself could show more moderate gains. For noteholders, it makes the kicker very attractive,” he said.

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

The notes priced on Thursday and settled on Monday.

The Cusip number is 22552J245.

The fee is 2.5%.

The day before

Separately, Credit Suisse AG, London Branch priced $3.68 million of 0% capped knock-out notes due Jan. 31, 2024 linked to the iShares MSCI EAFE ETF, according to a 424B2 filing with the SEC. The notes priced a day prior to the other issue.

The two-year notes (Cusip: 22553PGP8) pay par plus 2x leverage up to a 25.2% cap. The barrier at maturity is 90%.

“It’s not as attractive,” said McCoy.

“It’s a shorter maturity so you get less time to make up for losses if the market plunges, and your protection barrier is quite smaller.”

Balcom agreed.

“I prefer the three-year one. There’s more downside protection,” he said.

“We try to stick to three-year notes because pricing can really improve compared to two years. Interest rates are better.”

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

The fee is 1.5%.

© 2015 Prospect News.
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