Credit Suisse’s buffered leveraged notes on EAFE, Stoxx offer ‘well-priced’ bet on Europe

By Emma Trincal

New York, Aug. 19 – Credit Suisse AG, London Branch’s 0% buffered accelerated return equity securities due Aug. 24, 2023 linked to the least performing of the iShares MSCI EAFE exchange-traded fund and the Euro Stoxx 50 index provide many of the terms growth investors are seeking, including a relatively short holding period, uncapped upside leverage and hard protection, making the structure appealing, advisers said.

If each asset closes at or above its initial level, the payout at maturity will be par plus 1.55 times the return of the least performing asset, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the least performing asset falls by 10% or less and will lose 1% for every 1% that the worst performer declines beyond 10%.

Outperformer

Steve Doucette, financial adviser at Proctor Financial, said he was surprised by the terms.

“It’s really amazing to get 1.55 times, no cap on a two-year note, especially on an underperforming asset class or I should say asset classes as neither of these has done as well as the U.S. market,” he said.

“And since you also have a 10% buffer, you’re guaranteed to outperform in either direction.

“You’re going to outperform by 10% on the downside unless it’s down by less than 10% and you’ll outperform on the upside with the leverage and no cap.

“It’s a neat way to get international exposure, especially on European markets.”

Mostly Europe

The iShares MSCI EAFE fund offers broad exposure to Europe, Australia, Asia and the Far East.

While the top country is Japan with a 22.56% weight, the fund is overweight Europe. The euro zone represents a third of the portfolio, according to iShares website.

This aligns the fund with the Euro Stoxx 50 index, which is the equity benchmark for the euro zone.

European countries overall, which include euro zone members as well as non-members, such as the U.K. and Switzerland, account for more than two-thirds of the fund.

“You can tell from a chart how those two indices are closely moving together.

“It’s amazing they can offer these terms with those things so tightly correlated,” he said.

The 0.981 coefficient of correlation between the two underlying happens to be the same as the one between the S&P 500 index and the Dow Jones industrial average. A coefficient of 1 would indicate perfect correlation.

Valuations

Another advantage of the note was the underlying asset class itself.

“If you look back over the past two years, both indices are significantly lagging the U.S.,” he said.

The Euro Stoxx 50 index has gained 28% over the period and the iShares MSCI EAFE ETF, 27%. In comparison, the S&P 500 has surged 52%, he noted.

“Those two indices are more attractively valued than the U.S.

“If there is a big jump, you get the full upside. If you get low returns, the leverage will boost the upside,” he said.

Doucette said that sometimes when a leveraged note is capped, he is willing to give up some of the leverage in order to increase the cap.

“You don’t even have to do that here unless you want to give up a little bit of leverage for more protection if you’re more bearish,” he said.

Good as is

Doucette said it’s hard to decide whether the note is fine as is or if the buffer should be reinforced.

“I don’t know what’s going to happen in the next two years. I don’t know how much exposure I want to have to Europe. You’ve got to do your due diligence first, especially for a worst-of, although again those two almost move together.

“I don’t know if I’ve ever seen something like that before: the no cap, the leverage, the hard buffer on a two year with tightly correlated indices.

“That note is pretty well priced,” he said.

Fee

At the end of July, Credit Suisse offered a structure similar to this product but on a three-year term and with a higher leverage factor of 1.85%. The buffer, worst-of payout and underliers were identical. Last month’s deal carried a 1.5% fee, or 0.5% per annum. The upcoming offering shows a 0.7% fee or 0.35% per annum.

“Those fees are pretty reasonable. It’s probably why you’re getting those terms,” said Doucette.

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he also liked the notes.

The uncapped return met one of his main requirements.

“My preference, as always, goes for an uncapped note. My reasoning is that whenever I’m taking equity risk, I want to be fully compensated for it, and that’s true whether there is leverage or not,” he said.

The 1.55 times leverage was also attractive based on his market outlook.

“The fact that we anticipate a low return environment in the next few years makes the leverage all the more helpful.”

The size of the buffer was also satisfactory, he added.

“Since it’s a two-year note, the 10% buffer is in line with the tenor and equity risk. I think 10% is OK.”

Not a bad place

An alternative to this payout would be a larger buffer with a cap. Medeiros said it’s impossible to say which one between this hypothetical version and the deal as it is would be the most appropriate in the current market.

“You can’t answer that hypothetical question. It depends on your view. Do the terms align with your outlook?” he said.

One advantage of the underlying investment theme was value. European and developed markets are less pricey than U.S. equity markets, he said.

“If as an investor you are confident in Europe, this note is not a bad place to be relative to the U.S. large-cap valuations,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes will price on Friday and settle on Aug. 25.

The Cusip number is 22552XTQ6.

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