Hot inflation makes Credit Suisse’s $3.4 million notes on Bloomberg Commodity index tempting

By Emma Trincal

New York, March 10 – Credit Suisse AG, London Branch’s $3.4 million of 0% accelerated barrier notes due March 9, 2026 linked to the Bloomberg Commodity index may appeal to investors as a hedge against elevated inflation. But concerns over the volatility of the index and the credit risk of the European issuer gave advisers pause.

If the index finishes at or above its initial level, the payout at maturity will be par plus 150% of the index return, subject to a maximum payout of par plus 60%, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls by up to 30%, the payout will be par.

Otherwise, investors will be fully exposed to index’s decline from its initial level.

High inflation

“The terms of the notes are reasonable, and it makes sense to look for commodities exposure as a diversifier and a hedge against inflation,” said Steve Doucette, financial adviser at Proctor Financial.

On Wednesday, the Labor Department reported a 7.9% CPI increase in February from a year ago, its fastest rise in 40 years.

“Lots of folks think inflation will be with us for a while. Now oil is skyrocketing, but you can see how it’s been going down in the last two years. Commodities are very volatile in general but they’re even more volatile now with the Ukraine crisis,” he said.

The Bloomberg Commodity index allocates about 13% to WTI crude oil and 13% to natural gas.

Agricultural commodities make for about a third of the index and the rest goes to metals with about 7% in gold and 6% in copper.

Volatile asset class

“You’re levered up 1.5 times up to 12.5% a year compounded. That’s reasonable. Nobody is going to complain about 12% especially if commodities give you what you’re buying them for – diversification from equities and a hedge against inflation,” he said.

But the asset class has been disappointing so far over the past few years to a point where Doucette brought his allocation down to zero.

“Commodity prices can fall through the floor or surge. But the funny thing is that it hasn’t done anything for a long time. Since the pandemic though it has gone through the roof,” he said.

From a peak in July 2008 to the pandemic-induced bear market of March 2020, the Bloomberg Commodity index fell 80%. But it has jumped 133% since then.

Bad decade

“Is the 80% barrier enough? That’s the big question,” he said.

“For years, commodities fell off the radar. We had a small exposure of 1% to 2% and it wasn’t going anywhere. We let it phase out. Now that we have the war in Europe and oil prices soaring, everybody is jumping on board,” he said.

Commodities returns have indeed been a source of frustration for a decade. Since the beginning of the equity bull market in March 2009 and for the next 11 years, the index lost half of its value.

“It did nothing for 10 years. Now it’s coming back.

“The structure is reasonable. But how much exposure do you want to have to commodities? That’s the question,” he said.

Creditworthiness

The credit risk was also a concern.

“It’s a four-year note. You need to factor in the credit risk,” he said.

Doucette systematically keeps track of issuers’ creditworthiness using credit default swap spreads.

“We always screen them out. When spreads widen, you’re going to have great terms. But do you want the credit risk exposure?

“Remember: Lehman offered great terms before they went under,” he said.

Credit Suisse’s CDS spreads have noticeably widened due to the Ukraine shock.

From 97 basis points the day before Russia’s invasion of Ukraine, this bank’s five-year CDS spreads jumped to 126 bps on Thursday, according to Markit.

During the same timeframe, a U.S. bank like JPMorgan saw its spreads widen to 82 bps from 69 bps.

European banks are particularly vulnerable, he said.

“Europe gets half of its natural gas from Russia. The war has to have some repercussions. There’s a risk of a recession in Europe. European banks, even if not directly exposed to Russia, could be the first casualties.”

Cap, barrier

Matt Medeiros, president and chief executive of the Institute for Wealth Management, was cautious about the notes. He pointed to the downside risk involved with commodities exposure in the current geopolitical environment.

“Commodities over the past couple of years have done extremely well.

“In fact, they’ve done so well, you might expect to see some pullback at some point. It’s certainly possible that prices could drop sometimes in the next four years and settle somewhere.”

For this reason, Medeiros, who usually objects to capped returns, had a different view on this note.

“It’s a decent cap because I don’t see the index continuing to grow in the next four years at its recent pace.

“If it were a short-term note, I wouldn’t take the 12% annual cap. But over four years, it makes sense,” he said.

However, Medeiros was not comfortable with the terms on the downside.

“Because we just had such a run up, I would prefer a lower barrier, something that would give me more than just a 30% protection.

“Ideally, I would want to see a hard buffer.”

The insufficient protection was the main drawback.

“I would pass on it,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes settled on Wednesday.

The Cusip number is 22553PMD8.

The fee is 2.75%.

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