Credit Suisse's Cert PLUS notes tied to S&P 500 offer good risk/return profile, analyst says

By Emma Trincal

New York, April 25 - Credit Suisse AG, Nassau Branch's 0% Cert PLUS securities due May 4, 2017 linked to the S&P 500 index offer an attractive risk/reward profile, said structured products analyst Suzi Hampson at Future Value Consultants.

The product lowers downside risk with a low barrier of 60%, she said, while enhancing returns because index gains are uncapped and slightly levered. In exchange, investors have to be willing to invest long term and take on the issuer's credit risk, she said.

If the index finishes above the initial level, the payout at maturity will be par plus 130% to 140% of the index gain, according to a 424B2 filing with the Securities and Exchange Commission.

A knock-in event will occur if the index falls to or below 40% of the initial level during the life of the securities.

If the index finishes below the initial level and a knock-in event has occurred, the payout at maturity will be par plus the index return. Otherwise, the payout will be par.

Versus an ETF

Hampson compared the upside potential of the product with an exchange-traded fund tracking the S&P 500.

"On the upside, it's pretty similar to an S&P 500 ETF. There's no cap. You do have some leverage, but it's only a 130% participation rate. Basically, you want the index to grow as much as possible. You are bullish.

"Compared to most enhanced growth products with a 200% to 300% participation rate and a cap, this is more in line with a direct investment in the ETF. The difference of course is that you're not getting the dividends," she noted.

On the downside, the low barrier lessens market risk. Similar products often tend to have either a higher barrier or a small buffer, she said.

Unlike an ETF, investors do get 100% of their principal back if the knock-in is not triggered assuming there is no default.

"With this product, you have less market risk thanks to the barrier. The difference with an equity investor is that you are willing to take on the credit risk. It's a less market risk, more credit risk trade-off," she said.

Risk and duration

However, riskmap - a Future Value Consultants rating that measures the risk associated with a product on a scale of zero to 10, is "not as low as one could expect," Hampson said.

"Part of that risk comes from the long duration," she said. "Even though it's harder to hit a low barrier of 60% than it is to hit one of 80%, you still have six years.

"And once there is a knock-out, once the S&P 500 is down by 40% or more, it may not be so easy to make it up, even on a six-year term."

High return score

Given the unlimited upside, the product received a good return score of 7.25.

The return rating is Future Value Consultants' indicator on a scale of zero to 10 of the risk-adjusted return of the notes. The average return rating for all products Future Value Consultants has recently rated is 4.5, said Hampson.

The probability tables of product return outcomes illustrate the healthy return score, she said.

Investors have a 20% probability of incurring a loss versus an 80% probability of generating a positive return. Within the gain buckets, the likelihood of scoring the highest return - more than 15% per year - is 34%, noted Hampson.

"The uncapped - to generate quite high returns," Hampson said.

Value

The value rating, on a scale of zero to 10, is "pretty good" at 8.50, Hampson said.

The rating represents the real value to the investor after deducting the costs the issuer charges in fees and commissions on an annualized basis.

However, the long duration of the product may have introduced a bias, she noted.

"Long-term products tend to rate higher on the value scale because we're looking at the value per annum."

She gave the following example: "If a one-year product was to price at 98, you would have 2% lost on fees. If the same product but with a six-year tenor priced at 88, you would get the same value score."

The overall rating, on a scale of zero to 10, is Future Value Consultants' opinion on the quality of a deal taking into account costs, structure and risk/return profile.

With this product, the overall rating was 8.

"It takes into account the high return and value scores," she said. "It looks good."

The securities (Cusip: 22546E3P7) are expected to price on April 29 and settle on May 4.

Credit Suisse Securities (USA) LLC is the underwriter.

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