UBS, Credit Suisse price nearly identical ETNs linked to Russell 1000 Growth for same client

By Emma Trincal

New York, June 12 – Two different agents priced nearly identical exchange-traded notes linked to the same index for the same client, a rare occurrence, which led sources to say that it was a customized deal and that the client, a heavy ETN institutional investor, was seeking credit diversification in requesting two different issuers.

Both products carry in their name the letters “FI,” which stands for Fisher Investments, a money management firm founded by Ken Fisher.

UBS AG, London Branch priced $550 million of 0% FI Enhanced Large Cap Growth ETNs due June 19, 2024 linked to the Russell 1000 Growth Total Return index, according to a 424B2 filing with the Securities and Exchange Commission.

The ETNs (Cusip: 902677780) have been approved for listing on the NYSE Arca under the symbol “FBGX.”

Separately, Credit Suisse AG, Nassau Branch priced $524.21 million of 0% Credit Suisse FI Large Cap Growth Enhanced ETNs due June 13, 2019 linked to the same index, according to a 424B2 filing with the SEC.

Both deals priced on June 10.

Credit Suisse plans to list its ETNs (Cusip: 22542D423) on the NYSE Arca under the symbol “FLGE.”

“Fisher wanted this deal,” a market participant said. “They decided to split it across two banks.”

“This investor has done several one-off deals in the past and several different ETNs.”

Twins

The two offerings are almost equal in size.

The terms are approximately the same: in both structures, the final payout is leveraged by a factor of two and the notional exposure is reset on a quarterly basis. The fees and financing charges are the same – 0.85% per year and Libor plus 44 basis points, respectively. Both products are callable, although the UBS offering has one year of call protection.

Also, the maturities (10 years and five years) are relatively short compared to most ETNs.

Finally, the underlying index used in those two products is identical.

The Russell 1000 Growth Index Total Return seeks to track the large-cap growth segment of the U.S. equity market and includes Russell 1000 index companies that are determined to have higher price-to-book ratios.

Russell 1000

Fisher Investments has used the Russell 1000 Growth Index Total Return before in other structured products or ETNs, according to data compiled by Prospect News.

Two years ago, UBS priced $946.2 million of 0% Fisher enhanced big cap growth securities due May 28, 2013 linked to the index. Built for the same client, the offering, which was not an ETN, was the largest structured note deal of 2012.

Less than a month later, in June 2012, UBS launched an ETN called FI Enhanced Big Cap Growth ETN for the same investor. It was listed under the symbol “FBG.”

“Fisher did three ETNs on this Russell 1000 Growth. The first was FBG, and now they’re doing those two. I don’t know what drove them to do another one with UBS. They look pretty much the same. But it’s definitely the first time they’re doing an ETN on this Russell 1000 with two issuers,” the market participant said.

Reset matters

Sources were not sure whether the new UBS ETN (ticker “FBGX”) was to “replace” the old one (ticker “FBG”).

“FBG is still in the market,” an industry source said.

But he offered an explanation for the introduction of a new UBS ETN, pointing to the leverage reset.

A closer look at the filings showed that the “FBG” ETN does not carry any reset while the new “FBGX” does.

“It’s what the client must have been asking for,” the industry source said.

“The leverage did not reset in the first deal, and that too was probably deliberate. The new one has a quarterly rebalance for the two-times leverage. These deals are customized for the client.

“Same underlying, but reset versus no reset. It’s a subtle difference, but that’s probably the main difference.”

The timing and frequency of the reset impacts returns as leveraged notes are sensitive to falling market prices.

Leveraged ETNs may reset notional exposure at various frequencies, such as daily, monthly or quarterly. Some, like the “FBG” ETN, do not reset. When there is no reset, the stretch of time over which the leverage applies covers the entire length of the deal, which will compound the impact of leverage and may skew the performance in a declining market, explained a structurer.

“There are a variety of options available with reset. Some of the large ETracs, for instance, have daily resets, others monthly or quarterly. Others just don’t reset,” the industry source said.

Shorter maturities

The relatively short duration of the two new ETNs was also a “fairly interesting” point, said the market participant.

“I think this has to do with the client,” the industry source said.

“A lot of the 30-year ETNs are done on the institutional side. You find shorter maturities when you look at ETNs customized for RIAs or mutual funds.”

Fisher Investments bought ETNs on a variety of indexes with several different issuers, the market participant said.

“With those two ones, they’ve done seven total,” he said.

Some examples include Credit Suisse’s 0% Credit Suisse FI Enhanced Europe 50 ETNs due Sept. 10, 2018 linked to the Stoxx Europe 50 USD (Gross Return) index, Deutsche Bank AG, London Branch’s 0% FI Enhanced Global High Yield ETNs due Oct. 12, 2023 linked to the MSCI World High Dividend Yield UDS Gross Total Return index and Barclays Bank plc’s 0% Barclays ETN+ FI Enhanced Europe 50 ETNs due June 5, 2018 linked to the Stoxx Europe 50 UDS (Gross Return) index.

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