Credit Suisse's accelerated notes on iShares MSCI EAFE: good for growth buyers, analyst says

By Emma Trincal

New York, Oct. 2 - Credit Suisse's offering of accelerated return notes tied to the iShares MSCI EAFE index fund offers more potential return than a direct investment in the underlying exchange-traded fund, with no additional risk, said structured products analyst Suzi Hampson at Future Value Consultants.

Credit Suisse, Nassau Branch plans to price 0% Accelerated Return Equity Securities due Nov. 1, 2012 linked to the iShares MSCI EAFE index fund, according to an FWP filing with the Securities and Exchange Commission. The bank also announced an almost identical deal, but with a Nov. 3, 2011 maturity date.

Uncapped and enhanced

The payout at maturity will be par plus 130% to 140% of any increase in the fund's share price, with the exact participation rate to be set at pricing, according to the filing. Investors will be fully exposed to any decline in the share price.

"What's attractive is the uncapped enhanced return here," said Hampson. "You can do much better than if you were to invest directly in the fund. This is a high potential return product."

Future Value Consultants assigned a 7.79 return rating to this deal on a scale of zero to 10, which is the firm's indicator to measure the upside potential.

Hampson said that the 130% to 140% participation rate embedded in the structure is what explains the high return score along with the volatile underlying.

The return rating is one of the three components used by Future Value Consultants' methodology to assign an overall rating, which rates the quality of a transaction. All ratings are on a scale of zero to 10.

High overall rating

This product has an 8.52 overall rating, which is "very high" Hampson said. The overall rating takes into account costs, structure and risk-return profile.

For this deal, not only the return potential but also value and simplicity contribute to the strong overall assessment.

The value rating of 9.27 - which indicates how much money the issuer spent directly on the assets versus fees and margins - is "very high" with this structure, said Hampson.

"Issuers are not taking too many fees, which means that the deal offers quite a good value," she said.

Finally, the straightforward structure - as measured by a simplicity rating of 8.50 in this deal - also plays a part in "pulling up" the overall rating, Hampson added, even if this component does not carry as much weight as the two others, contributing to only 20% of the overall versus 40% for return and 40% for value.

Equal risk opportunity

Hampson emphasized that the "volatility of the underlying is pretty good," which is one of the reasons why investors may enjoy an attractive payout on this note.

It is also why the product is a high risk security, she said. The riskmap, which is Future Value Consultants' measure on a scale from zero to 10 of the risk associated with a product, scores 8.08 here.

"It doesn't have any barrier or buffer, no downside protection at all. If the index falls, you immediately lose capital. It's one of the riskiest products we have on the service."

However, the risk of investing in the notes is the same as that of holding the ETF directly, Hampson said.

"If the investor was concerned by the capital loss, you would never lose more capital with these notes. You would lose just the same thing with the notes as you would have lost with the fund," she said.

But on the upside, the notes give investors the opportunity to "significantly outperform" the underlying MSCI EAFE Index.

"In growth terms, you'll always do better with this structured product because of the 130% uncapped participation," she said. "This is definitely for growth investors. At equal risk level, you get more growth with this than with the fund," Hampson said.

Not for income

The benefit of investing directly in the underlying, when compared to this structure, she said, is income.

"If the fund pays any dividends or coupons to investors, you wouldn't earn this with the product. I am assuming that this is where the difference lies. You're sacrificing your dividends. And in a period of three years, it can be significant. That's why you get an increased participation," she said.

The notes are expected to price Oct. 27 and settle Oct. 30.

Credit Suisse Securities (USA) LLC is the underwriter.

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