Credit Suisse issues first long/short CCO notes as Fitch launches CCO rating criteria

Credit Suisse has completed a $190 million issuance of the world’s first long-short collateralised commodity obligation (CCO) notes. The issue followed the April 17 publication of Derivative Fitch’s rating criteria for CCOs.

The AAA-rated notes are denominated in US dollar, euro and Australian dollar, across five-year and three-year tranches, and offer protected coupon payments. The principal repayments are based on the performance of long and short positions on a portfolio of commodities.

The Swiss bank priced the five-year and three-year tranches at a spread of 195 and 180 basis points over benchmark, respectively.

Gunnar Hoest, a director of fixed-income at Credit Suisse, said: “The combination of the long and short portfolio mitigates the risk to principal loss as well as mark-to-market value movements, while maintaining a yield substantially above most other AAA-rated instruments."

The product has opened up a new investment opportunity for investors who traditionally have not had exposure in commodities as an asset class, added Bikram Chaudhury, another director of fixed-income.

Meanwhile, Derivative Fitch, the derivatives analysis and rating arm of Fitch, said its new rating criteria “will increase transparency in the market and the understanding of CCO ratings”. As part of the release, Fitch launched a public Vector CCO model – the main analytical tool for the quantitative analysis of the reference portfolio – to replace the Beta model released in January.

The criteria and the model allow market participants to closely replicate Fitch’s analysis for CCO transactions, said the agency. The document also covers Fitch’s analysis of the other risks in a CCO, including structural risks, charged-asset risk and counterparty risks, as well as different types of CCO, such as managed CCOs and hybrid CDOs of commodity and credit risk.

Fitch said its quantitative analysis is based on its Monte Carlo simulation of the CCO structure.