Credit Suisse’s $10,000 notes on CS RavenPack AIS pioneer tradable news-analysis strategy

By Emma Trincal

New York, Oct. 31 – The deal may be small but it’s a big deal, a market participant noted. He was referring to Credit Suisse AG, London Branch’s $10,000 of 0% CS notes due Oct. 31, 2023 linked to the Credit Suisse RavenPack AIS Balanced 5% ER index, which priced Friday.

The payout at maturity will be par plus 240% of any index gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the index remains flat or declines, the payout will be par.

The index tracks the notional performance of an algorithmic U.S. large-cap sector-rotation strategy, based on sentiment scoring extracted from news data by RavenPack's artificial intelligence algorithms, according to the prospectus. The index is composed of at least four of the 11 industry-specific sub-indices of the S&P 500 index.

Innovation

“I haven’t seen that type of index before,” he said.

“There are tons of tools and trading software that help predict market sentiment based on news data mining...but I’m not familiar with any index so far.”

He said the new proprietary index differentiated Credit Suisse from other issuers that have priced notes on their own algorithms.

“Each bank has some kind of a dynamic allocation index. Here they’ve introduced an index that tracks sentiment. It’s not analyst ratings. It’s what we see on Twitter or on AP wires.”

While the deal was small, it represented an important breakthrough.

The underlying index is being used for the first time in a structured note, according to data compiled by Prospect News, which tracks U.S-registered notes.

“It may just be a test for now,” he said.

Data-driven

Credit Suisse launched the AIS index in collaboration with RavenPack a year ago.

The index was designed to provide “an innovative means to obtain exposure to asset allocations that are systematically selected by sophisticated data-driven analysis,” said Elaine Sam, head of U.S. equity derivative sales, in a press release the bank issued at the time.

RavenPack is a data analytics provider that specializes in artificial intelligence systems designed for financial institutions. In 2011, the firm created a news sentiment index based on what it called the Event Sentiment Score on which the RavenPack Artificial Intelligence Sentiment (AIS) index was based.

Vol target

The underlying for the notes adds a volatility-control feature with a 5% target for the realized daily volatility of the underlying portfolio.

The volatility cap was needed in order to build the structure, observed an industry source.

“When you structure principal-protected notes, you need very cheap options. The 2.4 x leverage, no cap is not cheap even on a five-year when you provide full downside protection,” he said.

The risk with cash

“You need to reduce the volatility of the underlying in order to do that. Many proprietary indexes are designed that way using a volatility target. Most face the same issue though: by lowering the vol, you can dampen the performance.”

The prospectus in its risk section warns about the risk of getting a “significant portion” of the portfolio allocated to cash as a result of the rebalancing needed to meet the volatility target.

“I won’t be able to give you 2.4 times leverage on the S&P with those terms. But I can give you 2.4 times a mix of cash and equities. And if it’s on a 100% cash portfolio I can give you even more because it’s not going to move.

“Leverage is cheap when you lower the equity component.”

Credit Suisse Securities (USA) LLC is the agent.

The Cusip is 22551LDS6.

© 2015 Prospect News.
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