CIK - CIK: Remarkable Market Action In This Credit Suisse CEF

2023-03-17 15:00:00 ET

Summary

• Credit Suisse Asset Management Income Fund is a high yield closed end fund.
• CDS levels spiked massively for Credit Suisse on March 15 saw a massive spike in, and the share price was pummeled.
• CIK traded down more than -7%, while its HY CEF peers were down only -2%.
• The article takes an in-depth look at the counterparty risk run by CIK and its correlation to Credit Suisse's fate.

Thesis

March 15, 2023 was a day for the ages - the regional banking crisis continued in the U.S., while internationally, Credit Suisse ( CS ) came under assault. With its CDS levels spiking to the 2008 Great Financial Crisis levels and its stock plummeting, the bank was teetering on the brink. The relentless market speculation around Credit Suisse's viability resolved itself via an announcement from the Swiss Central Bank regarding a ?50 billion liquidity backstop. We are living in historic times as we speak. Having worked on a credit trading desk during the '08-'09 crisis, I can tell you that these sorts of days are not fun, and today's environment is extremely robust and reactive versus the Great Financial Crisis.

It took regulators only a weekend in the U.S. to announce a new liquidity facility for regional banks, and it took Swiss regulators only a full day to come to the conclusion they need to shore up confidence in an international systemically important bank. Lessons have been learned from '08-'09 and the current regulatory framework is robust and reactive, ensuring there will be no further meltdowns. While we are not sure where the Credit Suisse stock price will end up, we can categorically affirm they will stay solvent until broken up or taken over.

The downturn in the Credit Suisse common equity had a collateral victim - namely the Credit Suisse Asset Management Income Fund ( CIK ). CIK was down over -7% on March 15, while other high yield closed end funds were down only 2% to 3%:

A remarkable market action on CIK, which we believe is driven by its nomenclature and association with the parent company of the asset manager, namely CS.

What is the Counterparty Risk for a CEF?

The market action in CIK on March 15 brings up an interesting point - what is the counterparty risk for CIK, and does Credit Suisse own CIK?

Let us have a closer look at the CEF's structure:

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.

The only issue one can think of is the leverage part - does the fund get its Repo Leverage from CS?

From its 2022 Annual Report , the fund is telling us that it does not. The CEF discloses a funding facility with State Street Bank and Trust Company. Therefore, CIK's assets do not get tangled in the CS estate, and in reality, have very little to do with the CS fate. CIK is not an ETN and will not have the same issues we saw with the Lehman ETNs in the past.

Our opinion is that Credit Suisse will survive in one form or the other, and more importantly, Credit Suisse Asset Management is a prized possession that makes money without employing the balance sheet (i.e., taking risks) therefore it will be divested or taken over. CIK is a freestanding entity that is just being advised by CS Asset Management in terms of portfolio/credits allocation. Granted, the investment advisor is the primary culprit for a positive fund performance, but the CEF will not fall over tomorrow if CS does.

Ex-Dividend Day

March 15, was also the ex-div date for the CEF. Usually, we see a decrease in price equal to the dividend paid. That would equate to a little bit under 1% for the fund. We saw a move exceeding -7%!

We do not think the dividend date in itself caused the move, but it exacerbated it. What do we mean? In essence, investors were waiting to get the dividend in order to get out. I think a number of accounts had set up sale orders after they had ensured receipt of the latest dividend here.

Premium/Discount to NAV

We are now seeing the CEF move towards the bottom of its historic discount range:

We can see how the fund has moved throughout the years between -10% discount and 0% to net asset value. Moving towards the bottom represents a good entry point from a discount perspective.

Conclusion

Credit Suisse Asset Management Income Fund is a high yield closed end fund. The fund saw a monstrous drop in price on March 15, a drop which exceeded -7%. Its peers in the HY CEF space exhibited more muted moves, none in excess of -3%. When analyzing CIK's structure, we can see that, despite its nomenclature, the fund has very little to do with Credit Suisse. The vehicle holds its cash and securities with State Street. Similarly, its repo facility is with State Street. A CEF is an independently incorporated entity, with its own directors, accountants, and books. Outside its name and investor advisor, CIK has very little to do with Credit Suisse. A theoretical failure from this systemically important bank would not cause CIK an immediate loss. The fund would need to sort out a new investment advisor agreement, but its assets are not going to be entangled in the Credit Suisse estate. That being said, we are of the firm belief CS will remain solvent in one form or another, and that regulators are going to see that a Lehman moment is not going to be repeated.

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