CIK - CIK: Just Vote 'Yes'

2023-07-28 09:39:45 ET

Summary

• Credit Suisse Asset Management Income Fund is a fixed income closed end fund that has been affected by Credit Suisse's merger with UBS.
• The merger has voided the Investment Advisory Agreement, leading to a proxy vote on a new agreement, which could see UBS Investment Advisers take over.
• CIK's performance has been driven by its portfolio management team, which we think shareholders would want to remain in place following the merger.

Thesis

Credit Suisse Asset Management Income Fund ( CIK ) is a fixed income closed end fund. The vehicle focuses on high yield and has been actively covered by us, with a nice piece here penned during the Credit Suisse default saga. In that article, we stated the following:

A closed end fund is an entity in itself. CIK is a corporation that files reports with the SEC. CIK is NOT owned by Credit Suisse. CIK is owned by you, the shareholders in this closed end company. What we can see from above is that the fund holds its cash and securities with State Street, and has an independent accountant in PWC. The only services performed by Credit Suisse Asset Management are the ones around the Investment Adviser mandate. If, theoretically, something were to happen to Credit Suisse, the fund can choose another investment adviser.

As we all know by now, CS was merged into UBS, a merger which has now closed from a legal standpoint. Most Investment Advisory Agreements have 'change of control' clauses, where the cessation of an entity in its format would bring about the cessation of the Investment Advisory Agreement. These clauses are drafted for the protection of the CEF and its shareholders, since the new entity might not be as competent as the old one, or might have different goals.

To that end, with the UBS merger now legally completed, the Investment Advisory Agreement has been voided.

Proxy Vote on a new Investment Advisory Agreement

A proxy vote is now in play, asking shareholders to vote on a new Investment Advisory Agreement:

Each Fund was party to an investment advisory agreement with Credit Suisse and Credit Suisse was party to a sub-advisory agreement with Credit Suisse UK with respect to the Strategic Income Fund prior to the Closing Date (collectively, the “Prior Advisory Agreements”). As required by the 1940 Act, each Prior Advisory Agreement provided that the agreement would automatically terminate upon its assignment. The closing of the Merger was deemed to result in an assignment of each Prior Advisory Agreement, resulting in its automatic termination as of the Closing Date. Your Fund requires shareholder approval of its New Investment Advisory Agreement and the Strategic Income Fund requires shareholder approval of the New Sub-Advisory Agreement for the Funds to continue to receive investment advisory services from Credit Suisse and, in the case of the Strategic Income Fund, Credit Suisse UK.

With respect to each Credit Suisse Investment Adviser, it is currently anticipated that the UBS Transition will be effected by: (i) merging the Credit Suisse Investment Adviser into a UBS Investment Adviser (with the UBS Investment Adviser surviving), (ii) transferring Credit Suisse’s investment advisory agreements with the Funds and, in the case of Credit Suisse UK, the sub-advisory agreement between Credit Suisse and Credit Suisse UK with respect to Credit Suisse Strategic Income Fund, to one or more UBS Investment Advisers, and/or (iii) having the Funds enter into new investment advisory agreements and, if applicable, sub-advisory agreements with one or more UBS Investment Advisers.

Your vote to approve your Fund’s New Investment Advisory Agreement is necessary to ensure that Credit Suisse and, in the case of the Strategic Income Fund, Credit Suisse UK, can continue to manage your Fund until the UBS Transition is completed prior to the expiration of the Time-Limited Exemption one year after the Closing Date (i.e., on or prior to June 12, 2024).

Ultimately, the success of CIK through time has been determined by its team of portfolio managers, as part of the CS Asset Management unit. From the public sources available, it seems that UBS sees this division very favorably, with most of the cuts at CS to be done at the investment banking unit.

As a shareholder in CIK, we are focused on one very simple thing - keep the current portfolio management team at CIK intact. They have been able to generate really good alpha for the fund through time, and we believe they are well suited to do so in the future. To that end, we are in favor of a new agreement with the merged CS Asset Management unit, and also we are hopeful that from a personnel standpoint there will be no changes at CIK.

Analytics

• AUM: $0.2 billion
• Sharpe Ratio: 0.49 (3Y)
• Std. Deviation: 9 (3Y)
• Yield: 9%
• Premium/Discount to NAV: 3%
• Z-Stat: 1.4
• Leverage Ratio: 30%
• Composition: Fixed Income - HY Bonds
• Duration: 3.16 yrs
• Expense Ratio: 1.91%

Performance

Since the near-default experienced by CS, the fund is up over 20%:

We wrote an article at the time regarding the irrational panic experienced during the event. While investors in CS ETNs had a good reason to be worried (ETNs are basically bank debentures), CEF shareholders are owners of a separate company.

We can see that a large contributor to the CEF's performance this year has been the unwind of the 'panic trade':

As CS was on the brink of collapse, the CEF moved from flat to NAV to a near -10% discount. That discount has now reverted to a premium, giving the CEF an almost 13% boost from the normalization of the perception trade.

While a CEF's survival is not dependent on its investment manager, its long term alpha generation is very much correlated with a good portfolio management team. Ultimately, anybody can add a 30% leverage ratio to a portfolio of high yield credits. Even you the reader can do that. Printing a respectable performance is a different ball-game altogether though.

Holdings

The fund is mostly composed of corporate bonds:

Roughly 67% of the collateral pool is represented by bonds, followed by leveraged loans at 20%, and CLO securities at 5%. The CEF is keeping a large cash balance (short-term investments) of 8%.

In the above table, the "Level 1", "Level 2" and 'Level 3" designations, reference the liquidity of the underlying instruments. All else equal, an investor wants a collateral pool to fall in the "Level 1" and "Level 2" categories. "Level 3" assets are extremely illiquid, and they are valued using various inputs as proxies rather than being able to obtain a bid. Usually, portfolios heavy on "Level 3" assets experience large gap-downs in price during risk off events. Only 2% of the collateral pool is "Level 3" here.

Conclusion

CIK is a fixed income closed end fund. A CEF is a company in itself, with its own board of directors, accountants and assets. The only item that links CIK to Credit Suisse is its Investment Advisory Agreement. As CS has now been legally merged into UBS, it has triggered a 'change of control' cause in the initial Investment Advisory Agreement. These 'change of control' clauses are beneficial to shareholders since they ensure there are never substantial and unapproved changes that could be detrimental to shareholders. In this instance, the 'change' was a positive one, with the UBS merger ensuring the survival of CS. CIK's performance has been driven by its portfolio management team, which we would like to remain in place. We own CIK, are Holding it for the dividends, and are voting 'Yes' for the new Investment Advisory Agreement.

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