Credit Suisse's CS global basket notes on three baskets help navigate all markets, source says

By Emma Trincal

New York, Aug. 2 - Credit Suisse AG, Nassau Branch's upcoming 0% CS global basket notes due Sept. 3, 2015 linked to the best performing of three baskets give investors a chance to weather almost any type of market with less risk, said a financial adviser.

Each basket consists of different weights of the SPDR S&P 500 ETF trust, the iShares Barclays 20+ Year Treasury Bond fund and the SPDR Gold trust.

"Whether you have a bull market, a bear market or a do-nothing market, they got you covered," said Carl Kunhardt, director of investment management and research at Quest Capital Management.

Basket A contains a 50% weight of the SPDR S&P 500 ETF trust, a 20% weight of the iShares Barclays 20+ Year Treasury Bond fund and a 30% weight of the SPDR Gold trust, according to an FWP filing with the Securities and Exchange Commission.

Basket B contains a 20% weight of the SPDR S&P 500 ETF trust, a 30% weight of the iShares Barclays 20+ Year Treasury Bond fund and a 50% weight of the SPDR Gold trust.

Basket C contains a 30% weight of the SPDR S&P 500 ETF trust, a 50% weight of the iShares Barclays 20+ Year Treasury Bond fund and a 20% weight of the SPDR Gold trust.

The payout at maturity will be par plus the average return of the best-performing basket measured semiannually over the life of the notes. There will be a floor of par.

Best versus worse

Unlike other deals recently announced by Credit Suisse in which the payout is linked to the worst performing of three indexes or exchange-traded funds, these notes see their return tied to the best-performing underlying basket. Another important difference is that with this deal, all three baskets consist of the same constituents, which are simply organized in different weightings. Typically, the worse-of structures are linked to three very distinct funds, according to data compiled by Prospect News.

"I don't know how much value this change of weighting brings to the investor in comparison to an equally weighted basket. It depends on the correlation between the constituents," said Suzi Hampson, structured products analyst at Future Value Consultants.

"The selling point with the three different weightings is that, if for instance the S&P doubles and the others stay the same, then you'll capture the best with the basket that has a 50% weighting in the S&P," she said.

Little correlation

"There is more value if the underlyings are not correlated," Hampson said. "Because one may be up and the other down, and then you get exposed to the growth of the best performer."

The SPDR S&P 500 ETF trust is an exchange-traded fund that tracks the S&P 500 index.

The iShares Barclays 20+ Year Treasury Bond fund provides results that correspond to the performance of the long-term sector of the U.S. Treasury market.

The SPDR Gold trust seeks to mirror as closely as possible the price of gold bullion.

"What I like is that they kept it simple," said Kunhardt.

"You have a U.S. equity component; a long-term government bond component and a commodity hedge component. And those three things are not correlated to one another. Gold has zero correlation to stocks and bonds; and stocks and bonds have only a little bit of correlation," he added.

Bull, bear, nowhere

"It's a nice mix," Kunhardt said about the three different types of baskets.

Basket A with a 50% weighting for the S&P 500 is "very much of a bull market basket," Kunhardt said.

Basket B with the largest allocation to gold "is the bear basket: stocks don't do well; gold is fabulous; treasuries are OK," he noted.

In basket C with the 50% weighting for Treasuries, "stocks are not doing well, and there is not a great deal of movement. It's the do-nothing market," said Kunhardt.

"They took a broad market: the bulls get basket A, the bears, basket B and if the market does nothing, you get C."

Averaging and volatility

Views differed regarding the payout structure and the fact that performance is not evaluated from the initial date to the final valuation date at maturity, or "point to point." Instead, performance is measured semiannually and the payout is calculated from an average.

"It's quite a complex payoff. It is hard to put together principal-protected products since rates are so low. Making the deal a little more complicated can make it sound good," Hampson said.

In addition, Hampson said that the averaging measure tends to diminish gains compared to a point-to-point calculation.

"The selling point is that averaging will help against falls at the end of the investment. But when you have semiannual averaging throughout the whole life of the security, it will dampen the return," Hampson said.

"The more averaging points you have, the lower the return eventually," she said.

Kunhardt said that averaging was a way to reduce volatility and to remove risk even more.

"When an investor feels risk, there are two components: One is the fear of losing money, and that's what principal protection protects you against. But the other element is the chance of getting less than you expected. You expected six and you get four. That's risk. It's different from losing money, but it's there," he said.

"By looking at returns semiannually, you mitigate sharp drops," he added. "And then you have the principal protection. I love this deal. I don't know what is not to like about it."

The notes (Cusip 22546EXQ2) are expected to price on Aug. 31, with settlement on Sept. 3.

Credit Suisse Securities (USA) LLC is the underwriter.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.