The structure is designed to give ratings-driven institutional investors, such as banks and asset managers, an opportunity to diversify out of traditional asset classes with a degree of comfort. Coupon payouts are guaranteed and the principal is triple-A rated, but the strategy still provides souped-up returns.
"CCO products have been around a while now," says Gunnar Hoest, a director in Credit Suisse's fixed income team. "But the thing we found is that recent volatility in the commodity sector has made investors look for alternatives to long-only products. What this long/short product does is to give them access to the same opportunities but in a more balanced, less risky way."
Although the product was developed in Asia it was sold globally, mostly to US investors. A follow-on deal is already in the pipeline. The secret of this success, says Hoest, was to attract investors who wouldn't normally look at commodities by packaging the deal in a way that made it easy for them to compare alongside their regular investments, while at the same time offering the obvious benefit of diversification.
The performance of the notes is linked to a pool of 17 commodities through a fixed portfolio of long and short trigger swaps û in other words, bets on the price of the underlying commodities at the notes' maturity. There are between two and 20 trigger swaps on each commodity, with triggers ranging from 12% to 60% of the commodity spot price.
The long portfolio is biased towards base metals, reflecting Credit Suisse's bullish in-house view, and comprises 100 equally weighted bets divided between 13 commodities. The short portfolio, which is biased towards energy, comprises 100 bets on the price of nine commodities. There are each-way bets on five commodities that appear in both long and short portfolios: corn, wheat, silver and crude oil (Brent and West Texas intermediate).
Options in the long portfolio that hit their trigger price lose money, but should be balanced by the triggered options in the short portfolio, which make money. Roughly speaking, the losses on the portfolio are calculated by subtracting the number of short triggers from the long triggers.
As well as reflecting Credit Suisse's house view on commodities, the structure also taps into a relative value play between the pricing of the underlying options to generate the high returns.
The notes are split between two series: a four-note tranche due in 2012 û three floating-rate notes of $70 million, Ç25 million and A$9 million, and a fixed-rate note of Ç6.5 million û and a $70 million three-year note. The 2012s pay 195bp over Libor (or equivalent) and the 2010 pays 180bp. Credit enhancement helps to boost the ratings, provided by Fitch, up to the triple-A level on both the coupon and the principal.
The credit enhancement, in effect, means that investors get protected from the first 15 losing bets on the five-year series and the first 10 on the three-year.
Credit Suisse is acting as the swap counterparty.
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