Credit Suisse’s $2.58 million buffered leveraged notes on S&P MidCap 400 offer ‘fair’ tradeoff

By Emma Trincal

New York, Sept. 22 – Credit Suisse AG, London Branch’s $2.58 million of 0% buffered accelerated return equity securities due Feb. 21, 2024 linked to the S&P MidCap 400 index give moderately bullish investors a chance to outperform the index given current market levels and the structure of the product, advisers said.

If the index return is positive, the payout at maturity will be par plus 150% of the index return up to par plus 27%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by 10% or less and will lose 1% for every 1% decline beyond 10%.

Less common underlying

“It’s a straightforward note. No call. You’ll be in it for 17 months,” said Donald McCoy, financial adviser at Planners Financial Services.

“It’s a relatively conservative way to keep people invested with some downside protection.”

The choice of the underlying may appeal to asset allocators seeking diversification.

“At least it’s a little bit different,” he said.

Most notes are linked to large-cap stocks through the S&P 500 index or to the small-cap universe via the Russell 2000 index.

Exposure to the mid-cap segment of the U.S. equity market is not as common, according to data compiled by Prospect News.

Only eight offerings based on the S&P MidCap 400 index have been priced so far this year for a total of $27 million, the data showed. These figures pale in comparison with the 2,280 offerings tied to the S&P 500 index, which amount to $16 billion. For the Russell 2000 index, 21 deals have been issued this year for a total of $243 million. These figures count each index as a sole underlier, not as part of a basket of indexes.

“For some people, mid-caps are a sweet spot. You’ve got lesser-known companies that tend to have more domestic economic exposure than large-caps,” he said.

View-dependent

As with most notes, the appeal of the structure was a function of one’s market outlook.

“If you think we’re at an inflexion point and that the market is bottoming out, you probably wouldn’t accept the cap and you may think there’s no need for a buffer,” he said.

Such view may be justified by the steep decline in the index. The S&P MidCap 400 index closed at 2,288 on Thursday, 21.4% off its mid-November high of 2,910.

“If on the other hand, you think the market is going to be volatile but will finish up at the end of the 17 months, then the notes would be attractive. The index drops 10% and you get your money back. It’s up 10% and you get 15%. The structure is geared toward people who hold that kind of middle of the road view,” he said.

Mildly bullish

The note is only 17 months long, which requires having a view over the short term. Depending on investors’ concern about further downside, the product may not provide enough time for the index to rebound.

“This is for someone moderately optimistic over the next 17 months. You expect the market to finish positive within this timeframe. This is not an unreasonable expectation. Given that this index is already down more than 20% and has been down some time, the expectation is pretty much in line with the consensus,” he said.

Recovery on time

Volatility may still persist, he noted.

“You could very well expect the market to continue to swim around for a little while but at some point, within the period, it’s going to rebound because that’s what markets do: they turn around and head back up. If that’s your outlook, the note may be attractive. The 1.5 times kicker gives you a little bit of juice with some downside protection,” he said.

Bearish investors would stay out of the market, he said. Cautious investors may like the notes but would probably want to add more downside protection. McCoy said he belonged to this second category.

“You could be moderately bullish and still want more protection on the downside. I don’t mind the note. But I would be more comfortable with a larger buffer,” he said.

In-between

A financial adviser welcomed the underlying and the structure.

“It’s been a while since I’ve seen more plain-vanilla deals instead of those worst-of. This is the kind of note I’m interested in for my clients,” he said.

“For a change, it’s not another S&P or Russell product, which is nice. The midcap index is somewhere in between – more volatile than the S&P but less so than the Russell.”

Discounted entry price

The current bear market signals good entry points for market participants. The S&P 500 index shed more than 21% year to date and the Russell 2000 index lost more than 23%. The Nasdaq-100 index dropped nearly 30%.

“U.S. equities are already down significantly. The leveraged upside plus the 10% buffer look pretty attractive to me,” he said.

For this adviser, the downside protection was adequate.

“Six months ago, when the market was near its peak, more downside protection would have been required, but now, everything is much cheaper. Even if we go through another drawdown, we’re already more than 20% down from the highs. Given where we are, I think it’s pretty conservative. I’m comfortable with a 10% buffer,” he said.

Return expectations

The upside potential matched his view as well.

“The fact that it’s levered 1.5 times up to a 27% cap is also very compelling,” he said.

The cap for this duration is the equivalent of an 18.4% compounded annualized return.

“We don’t have tremendous forward expectations at this point. So, I don’t expect the cap to be an issue,” he said.

“For such a short-term note, you need a cap anyway if you want to have a buffer.”

In conclusion, he said his opinion on the note was favorable.

“I think it’s a fair tradeoff. I also very much like the fact that it’s a simple note, not a complicated worst-of, which is always difficult to explain to a client.”

Credit Suisse Securities (USA) LLC is the agent.

The notes settled on Tuesday.

The Cusip number is 22553QL39.

The fee is 0%.

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