Credit Suisse Debuts Geared Merger ETN

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Credit Suisse, the Switzerland-based investment bank and asset manager, today is rolling out a double-exposure exchange-traded note that attempts to profit from merger activity, in a follow-up to a similar, single-exposure ETN it launched in October 2010.

The 2x Monthly Leveraged Credit Suisse Merger Arbitrage Liquid Index (Net) ETN (NYSEArca:CSMB) is rebalanced monthly, and is a follow-on to the Credit Suisse Merger Arbitrage Liquid Index (Net) Exchange Traded Notes (NYSEArca:CSMA). Both securities aim to capture the spread between the price at which the stock of a target company trades after a proposed acquisition is announced, and the price which the acquiring company will pay.

The products have come to market at a time when many are looking to the world of mergers and acquisitions as a source of growth in an environment of slow job growth and economic sluggishness. The first product, the single-exposure CSMA, has gathered $56.2 million since its launch, and an official at Credit Suisse said the idea for a leveraged version of the merger-arbitrage ETN came, in part, from clients requesting one.

Credit Suisse said the ETN is designed to have lower volatility than equity markets and low correlation to them. Gains are booked when deals are closed, and losses are incurred when deals break. The relatively slow, accretive return profile of the strategy makes it ideal for a leveraged version, the Credit Suisse official said. He estimated annualized returns of the strategy of about 7 percent with volatility of around 3 percent.

"If I were to try and pick out a strategy that would be a good candidate for leverage, this would probably be the poster child for it," Michael Clark, managing director of Credit Suisse's structured product distribution, said in a telephone interview, adding that its attractiveness has been evident recently as equities have sold off.

"With Libya and everything else like that, quite frequently we'd have days where equities were down 50 to 100 basis points, and the strategy held in there. It may have been down a penny or two on the ETN, but not much more than that," Clark said. "So if I'm going to lever something, I want something that has as little beta to the market as possible, and the correlation is low and the volatility is fairly low," he said.

The products compete most directly with the IQ Merger Arbitrage ETF (NYSEArca:MNA) from the Rye Brook, N.Y.-based money management firm IndexIQ. MNA has a net expense ratio of 0.75 and a gross expense ratio of 0.77 percent. A big difference between ETFs and ETNs is that ETNs are not taxed until the note is sold by the holder, called by the issuer or it expires. That's an important consideration for a merger security in which the underlying exposure shifts quite a bit, the Credit Suisse official said.

Conversely, ETNs, which are credit instruments, are backed by the good faith and credit of the issuer. To that extent they have credit risks associated with them that ETFs don't.

Both CSMA and the double-exposure CSMB are based on an index that uses a quantitative methodology to track a dynamic basket of securities held as long or short positions and cash. Holdings are weighted in accordance with certain rules to include publicly announced merger and acquisition transactions that meet certain qualifying conditions. Under the index's rules, companies can be added to the index five days after the announcement of a planned merger, and the value of any one deal can't exceed 7.5 percent of the entire portfolio.

The leveraged CSMB, a senior subordinated debt obligation issued by Credit Suisse, has an annual expense ratio of 0.55 percent, the same price as CSMA. The new levered note matures in 2031.

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Copyright ® 2011 Index Publications LLC . All Rights Reserved.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: CSMA , MNA

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