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
"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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