Advisers to seek extra leverage on Credit Suisse’s $2.78 million absolute return notes on S&P

By Emma Trincal

New York, Sept. 29 – Credit Suisse AG, London Branch’s $2.78 million of 0% absolute return Buffered Accelerated Return Equity Securities due Sept. 28, 2027 linked to the S&P 500 index should emphasize return enhancement rather than risk control by upgrading the leverage, some advisers said citing the long tenor and currently depressed valuations, which both should concur to mitigate some of the risks on the downside.

If the index finishes at or above its initial level, the payout at maturity will be par plus 1.3 times the return of the index, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par plus the absolute value of the return if the index falls by 30% or less and will lose 1.42857% for every 1% that the index declines beyond 30%.

No buffer needed

“I don’t really like long-term notes. Five years is lengthy for a note,” one adviser said.

“It’s good to have some leverage with no cap over a long period of time though. But I don’t think you need a 30% buffer on a five-year especially when you’re buying this note at such depressed levels. The protection is already built in.

“I’d rather do away with the downside protection and see how much additional leverage I could get on the upside.”

Another justification for the elimination of the buffer and the absolute return was the long duration.

“No one can predict where the market will be in five years. But if you look at historical returns, the chances of losing money over a five-year period are very slim. It’s probably under 10% or even under 5%. I don’t have the exact data but that’s my guess,” the adviser said.

Removing the absolute return

Steve Doucette, financial adviser at Proctor Financial, said he would want more leverage on the upside but not to the point of eliminating the buffer altogether.

“Do you need this 30% protection five years out? Theoretically, no. But who knows? What’s for sure is that you lock your money out for five years and are at the mercy of the issuer,” he said.

Doucette said that he is “skeptical” about the value of absolute return features.

“How often is it going to pay off? I’ve never seen an absolute return paying off and I’ve done quite a few notes with it. It’s all timing. Five years out, the odds of paying off are very small,” he said.

“It would be beautiful if the index was down 29% and you’d get 29%. That’s huge!”

But such outcome was of course unlikely.

“You’re not even likely to need either the buffer or the absolute return because what are the odds the market will be down in five years?” he said.

More leverage

Since Doucette has little use for a feature, which is both “expensive” and “not helpful,” he would eliminate the absolute return in exchange for a more tangible benefit.

He said raising the leverage would be the natural way to enhance the upside since the note is already uncapped.

“The leverage plus no cap are good,” he said.

“I would get rid of the absolute return component. I would move the buffer up a little bit and increase the leverage.”

His objective would be to reach a leverage factor of 1.5 to 2.

“We’re at a good strike price now. The market is down 24% for the year. I’d rather take advantage of these levels and boost the upside,” he said.

Those decisions however are difficult to make, he said.

“It’s all about timing. You would think a five-year would be less risky. But within the next five years, this bear market will be over, we’ll probably go back up and who knows if we may not go back down again? There’s plenty of time for the market to go either way.

“The big challenge with these notes is timing. The fear of missing out can be a problem. The fear of an endless bear market can be a problem.

“You have to have a long-term perspective,” he said.

Good as it is

Another adviser was satisfied with the way the note was constructed.

The only concern with a longer-dated note, he said, was on the credit side. But longer notes in his view reduce the risk of market losses at maturity.

“When I look at a structured note, my first consideration is the issuer risk. I look at the issuer risk even before examining the notes. Obviously, five-year increases your exposure to a credit event. That said, I do like this note,” said Matt Medeiros, president and chief executive or the Institute for Wealth Management.

“I do like the fact that it’s core equity. I like the long-term from a market risk standpoint.”

Medeiros said the uncapped leverage exposure on the upside was very attractive.

“I’m not a fan of caps at all in general. My philosophy is that when you take equity risk, you should get equity returns without being capped out. So, I like the payout here.”

The downside was also attractive.

“The absolute return characteristic definitely adds value to the note,” he said.

While Medeiros typically prefers straight buffers, he did not mind the geared buffer in this case.

“I don’t have an issue with it here. The time factor makes a difference. It’s a five year and we’re already down significantly from the highs of January. So, I’m comfortable with the downside protection,” he said.

Credit Suisse Securities (USA) LLC is the agent.

The notes settled on Wednesday.

The Cusip number is 22553QLB1.

The fee is 0.85%.

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