Credit Suisse’s $1 million of notes on commodity basket tap into bullish momentum

By Emma Trincal

New York, June 15 – Credit Suisse AG, London Branch’s $1 million of 0% CS notes due June 13, 2024 linked to an equally weighted basket of commodities and commodity futures contracts should appeal to investors given the soaring prices of commodities driven by supply disruptions among other causes, sources said. While the bullish trend could revert by the time the notes mature, the downside protection offsets the market risk, they noted.

The basket consists of West Texas Intermediate Light Sweet Crude Oil futures contract, natural gas futures, corn futures contract, soybeans, copper and zinc, according to a 424B2 filing with the Securities and Exchange.

If the basket finishes at or above its initial level, the payout at maturity will be par plus the return.

Otherwise, investors will receive par.

Energy

“This may be a very attractive investment for a lot of people,” said Edward Moya, senior market analyst at multi-asset trading firm Oanda.

“A growing number of investors and traders are fixated on commodities because supply disruptions have pushed prices upward.

The trend is particularly visible with oil, one of the components of the basket, he added.

“The war in Ukraine, China’s demand picking up after the Covid lockdowns, the fact that OPEC is not really increasing output despite political pressures from the U.S. and other importing countries, all those factors contribute to skyrocketing oil prices.”

WTI futures rose from $71 a barrel a year ago to $115.86 today, a 63% jump.

“In addition to that, U.S. production has been flat in large part because oil companies during the pandemic had to drastically cut production.”

Food and natural gas

The outlook for the two agricultural commodities – corn and soybeans – was also bright, at least for the short term, he noted.

“We’re facing a global food crisis. Food inflation has been soaring. The food components of the basket should do well over the next 12 months or so.

Soybean prices have climbed 30% year to date.

The outlook for natural gas futures is more seasonal, he said.

“You’ll have very severe spikes during the winter.”

Industrial metals

For investors expecting an economic recovery, zinc and copper are relevant picks because their valuations are closely tied to economic growth, he said.

“Those two metals should see their prices rise when the global economic outlook improves. It could be because the recession is mild and short-lived or because recession fears are easing,” he said.

While the underlying basket was carefully designed, the timeframe of the notes raised some concerns, he said.

Two-year tenor

“The market right now is extremely bullish, and traders are focused on the short-term. Two years is a long time,” he said.

“Prices are so high right now... you could make the argument that we’re at or near a peak.”

One factor likely to put an end to the commodity rally would be a rapid decline in inflation as a result of aggressive policies.

On Wednesday, the Federal Reserve decided to raise interest rates by 75 basis points, its most significant increase in decades, in an effort to fight inflation.

“After the midterm Elections, you can expect a bipartisan effort to tackle inflation. The Fed’s primary objective is already to avoid stagflation. After 12 months, I’m a little bit skeptical about how much commodity prices could remain elevated let alone rise much more,” he said.

“The principal-protection is attractive for investors. But two years from now, you run the risk of a reversal of the current uptrend.”

Hedging tool

A market participant agreed with the idea that the terms were appealing but the timing risky.

“It appears very attractive,” he said.

“What you’re giving up is the carry. If Credit Suisse bonds yield 2.5% to 3%, you give up 6% for two years in purchasing the structured product.”

Investors, he explained, are buying an out-of-the-money put on the basket, which gives them 100% in principal protection.

“If the price is up, you get the full upside If it’s down, there’s no loss.

“It’s a great way to get commodity exposure,” he said.

But the downside was the risk of a recession.

“Commodity prices are already high. If we have a recession, you may not get any positive return. On the other hand, this product is a sweet spot for hedging an economic downturn,” he said.

A bit late

Matthew Bradbard, director at RCM Alternatives and a commodities trader, pointed to the timing of the trade.

“Doesn’t look terrible. It’s just a little late in the party,” he said.

“Commodity prices are up massively. It would have been a lot better a year ago. Commodities are getting more attention with the double correction we have in bonds and equities.”

A growing number of issuers have recently joined the “party” bringing to market small offerings of notes tied to the same basket or a similar variation of it. Those firms include Morgan Stanley Finance LLC, GS Finance, BofA Finance, UBS AG London Branch and Citigroup Global Markets Holdings Inc.

“Commodities are not a dirty word anymore,” he said.

“My takeaway is that Credit Suisse and others are getting their clients into the asset class.”

Credit Suisse Securities (USA) LLC is the agent.

The notes settled on Monday.

The Cusip number is 22553PZM4.

The fee is 1%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.