Credit Suisse’s $5.48 million absolute return step notes on S&P fit slow growth outlook

By Emma Trincal

New York, April 30 – Credit Suisse AG, London Branch’s $5.48 million of 0% trigger absolute return step securities due April 30, 2025 linked to the S&P 500 index allow investors with a mildly bullish or even moderately bearish outlook to outperform the market, advisers said.

If the final index level is greater than or equal to the initial index level, the payout at maturity will be par of $10 plus the greater of 20.75% and the index return.

If the final index level is less than the initial index level but greater than or equal to the downside threshold level, 75% of the initial index level, the payout will be par plus the absolute value of the index return.

If the final index level is less than the downside threshold level, investors will lose 1% for every 1% that the final index level is less than the initial index level.

Back to rich values

Jeff Pietsch, founder of Eastsound Capital Advisors, said the trade was timely given how fast the market has rallied from its March 23 low.

“I like it based on the recovery off the lows,” he said.

The S&P 500 index in April posted its biggest one-month gain since 1987.

“After this rebound, our valuations are quite high again despite the big drop in February. They’ve come back quite a bit.”

The notes priced on Monday, with an initial strike price of 2,878.48 for the S&P 500 index.

Such level remains 15% lower than the peak of Feb. 19. Yet the deal priced 31% higher than the market low nearly six weeks ago.

“That’s a very strong, fast rebound,” he said.

Having a market outlook for the next five years is always going to be challenging. But the intensity of the recent rally is certainly a factor to consider, he said.

Modest returns

“Our expectation five to 10 years out for future returns is moderate again based on the speed of the recovery,” he said.

“We can estimate the 10-year forward return using the Shiller approach.”

He was referring to the Shiller Cyclically Adjusted Price to Earnings ratio, also known as CAPE ratio.

Based on average inflation-adjusted earnings from the previous 10 years, it’s used to estimate future returns.

“We expect total returns to be in the low to mid-single digits over the next 10 years based on that,” he said.

Barrier, step

The barrier offering absolute returns on the first 25% of decline was appealing.

“It gives you a chance to counter the negative performance with a positive return,” he noted.

The return enhancement offered by the 20.75% step provided investors with an opportunity to beat the market in certain conditions.

“It’s quite attractive if you have a moderate forecast,” he said.

Range of possibilities

Unlike some structures which maximize the return on one or only a limited set of scenarios, this one came with an array of possible positive outcomes such as the absolute return, the step payment or even the unlimited participation above the step.

“You have a range of possible outcomes that this structure addresses,” he said.

“If you’re neutral with a slight positive outlook over that timeframe, it fits the bill.

“If you’re up, if the index goes up higher than you expected, you can participate.

“If it’s down less than 25%, you will outperform on the downside.

“You’re expanding the range of positive outcomes offered in a moderate return expectation environment.

“I think it’s timely given current valuations.”

Five years

Steve Doucette, financial adviser at Proctor Financial, said the notes were not for everyone.

“Interesting parameters... If you think you are only going to get 4% a year, I guess,” he said.

The tenor was a concern.

“Five years out, I’m not sure I’d want to lock up my money for so long.”

“It’s a long time to wait in anticipation of the market being either negative or slightly up but not much.

“That’s the only reason you would buy the note.

While noteholders don’t lose anything if the market rallies above the step level, they don’t outperform the market either, he said.

“There’s not much conviction there. It would only work for someone who thinks the market is not going anywhere during that that five-year period,” he said.

Bearish or skittish

While the note is non-directional in theory, the bias is mostly bearish, he added.

“If you’re bullish you have no reason to buy something like that. It only outperforms if the market is up by less than 4% a year,” he said.

“But if you’re concerned about the downside and if you’re right, you can outperform significantly.

“It’s more of a bearish note.”

Some clients however may find the notes helpful.

“You might want to substitute this for a bond or cash, especially if you’re worried about the downside and think the market is not going to do anything.

“That way you get a decent rate of return and you’re still OK if you’re wrong because you do have the upside participation,” he said.

UBS Financial Services Inc. is the agent.

The notes (Cusip: 22550V570) settled on Thursday.

The fee is 3.5%.

© 2015 Prospect News.
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