Times have never been tougher for product structurers - with interest rates in the US at near zero and option volatility soaring over the past 12 months, arrangers have been left with the slimmest of margins to create attractive offerings. Credit Suisse has adapted skilfully to the new environment to ensure its client base receives products that optimise the less-than-favourable conditions.
Equity market volatility has allowed Credit Suisse to offer 10 times' leveraged participation on some of its accelerated growth products. On another digital structure, the payout combined both knock-out and worst-of features, which allowed for more room in the upside cap. Instead of pulling back from the market, the bank has pushed ahead with alterations like these that will ultimately ensure that the product class sees out the difficult times ahead. While volumes have suffered across the industry, the structurer's issuance still hit US$3.1 billion in 2008, and when note volumes were down, it made up revenues in its over-the counter hedging business, which was very active in the last quarter of 2008.
The dramatic shift in market context means that some structured deals are now making far less sense than they were at inception. Credit Suisse has stepped in to restructure trades where possible. "There are massive restructuring opportunities," says Elaine Sam, vice-president, equities, derivatives marketing at the US bank's New York offices. One emerging markets trade that was entered into a year ago with a high entry level and a low cap was restructured to take into account increased volatility and the lower entry level, which allowed for a higher cap, says Sam.
This flexible approach has seen the bank structure some notable deals for its clients. Last year, it structured a leveraged, FX-linked note with a total value of $48 million for National City, which spoke to six providers of carry strategies in the market before selecting Credit Suisse. The note is linked to the bank's Rolling Optimised Carry Index (Roci), which uses an algorithmic strategy to weight long and short currency pairs in developed and emerging markets against the US dollar. The four-year structure allowed investors to enjoy 325% upside participation in the index.
A robust product offering is just one of the reasons why the bank has managed to secure distribution relationships with several third-party providers over the past 12 months, including LPL, Ameriprise, and the brokerage arms of JP Morgan and Deutsche Bank. It beat off stiff competition to win the business in each case, usually numbering eight to 10 other providers, and continuing a successful run that has seen Credit Suisse win every request for proposal it has pitched in the past two years.
"We felt like (Credit Suisse) had a very good understanding of our business model and how we work," says John Milder of LPL. "It has a strong balance sheet and has stayed away from some of the troubles that its competitors have seen," says Milder, who adds that advisers who used the bank's educational services were very impressed. Despite testing conditions, educational efforts have not been scaled back: in 2008 Credit Suisse ran six Structured Product Universities for 300 advisers, 30 Structured Product Townhalls for 800 advisers, and 12 educational conference calls covering 300 advisers, alongside educational modules and a full-time educational resource.
Secondary markets were also tested last year, as investors panicked about available liquidity. Credit Suisse has shown its mettle in offering secondary markets, using its Secnet electronic trading platform. The interface is still one of very few that can offer execution online without the need to call in, and handled the additional demand comfortably. "The volume of secondary trading doubled, if not tripled, last year," says Michael Clark, head of structured retail products for the Americas at Credit Suisse. "You can get destroyed as a provider on secondary trading, but we easily handled the increase in flow." It simultaneously lowered minimum trade sizes to $500,000.
Despite the fact that Credit Suisse is not a registered bank in the US, it is still making an entrance into the certificate of deposit (CD) space, a product that has exploded in popularity thanks to its Federal Deposit Insurance Corp protection. It is putting together a CD platform that will incorporate 12 issuers by the end of the year as a one-stop shop. As CDs combine both securities and banking law, it is certainly a structuring challenge, but one the bank feels is necessary, given that investor coverage per institution maxes out at $250,000. "People are getting saturated on names," says Clark. "We want to specialise in having multiple names. There is a huge appetite for multi-issuer."
New ideas and a proactive approach have put Credit Suisse at the forefront of the US market. "It is very good at showing new ideas that we have not seen from other dealers, and doesn't ask for sizeable lead commitments from our clients," says one distribution partner. "And from a pricing perspective it is very competitive." In the US market, where investors can usually access every asset class that they need, it is on the structures that the bank really distinguishes itself, he adds.
The week on Risk.net, March 10-16 2018Receive this by email