MLPO - MLPO: Energy Fund That Runs Credit Suisse Default Risk

2023-03-20 05:27:34 ET

Summary

• Credit Suisse S&P MLP Index ETN is an exchange-traded note focused on Energy equities.
• MLPs are master-limited partnerships that operate mostly in the energy transportation and storage sectors.
• MLPO is built as an exchange-traded note, with Credit Suisse as the issuer.
• An investor buying MLPO would be fully exposed to the credit risk posed by Credit Suisse.
• A retail investor needs to understand the dual risk of investing in MLPO, which consists of market risks associated with energy equities and the default risk associated with Credit Suisse.

Thesis

Credit Suisse S&P MLP Index ETN ( MLPO ) is an exchange traded note focused on Energy equities. As per its literature:

The Fund seeks exposure to the price return version of the S&P MLP Index . The Index includes both master limited partnerships and publicly traded limited liability companies. which have a similar legal structure to MLPs and share the same tax characteristics as MLPs that trade on major U.S. exchanges.

MLPs are master limited partnerships that operate mostly in the energy transportation and storage sectors. The sector is up over +150% during the past three years, but down in 2023.

What is specific about MLPO is its structure. The vehicle is built as an exchange traded note, with Credit Suisse as the issuer. Given the recent turmoil in the Credit Suisse shares, a retail investor needs to be aware that for a fund like MLPO, you are taking not only energy equities risk here but also Credit Suisse default risk.

ETN vs. ETF

Before we get lost in the acronyms let us spell out what an ETN is and what it entails for an investor. ETN stands for Exchange Traded Note, and in effect MLPO is a bond issued by Credit Suisse that gives an investor the stated returns. An ETN has inherently increased risk as compared to an ETF because it is not bankruptcy remote. An investor buying MLPO would be fully exposed to the credit risk posed by Credit Suisse. And in an outside scenario where CS would be taken over by a regulator / experience a bankruptcy event, an investor in MLPO would become a creditor to the estate, but in effect would lose a substantial amount of value unrelated to the MLP underlying exposure.

The most famous case of a bank bankruptcy is Lehman, and in effect there were a number of Lehman sponsored ETNs that serve a cautionary tale for ETN investors. Always ensure you understand the difference between an ETN and an ETF and be comfortable with the ultimate sponsor.

The best way to think about an ETN is that it is an actual funding vehicle for the underlying bank (Credit Suisse) in this case, and the institution is packaging a certain return profile within its bond so that it can i) fund itself, ii) gain certain management fees from the vehicle.

In effect, the issuer is fairly clear regarding the additional risks packaged into MLPO:

The ETNs may not be suitable for all investors and should be purchased only by knowledgeable investors who understand the potential consequences of investing in the ETNs. The ETNs are subject to the credit risk of Credit Suisse . You may receive less, and possibly significantly less, than the principal amount of your investment at maturity or upon repurchase or sale. Investors will not have any partnership interests or other rights in the MLPs included in the index. Coupon Amounts on the ETNs will vary and could be zero. An investment in the ETNs involves significant risks.

The fund highlights quite clearly the risk associated with the parent company, namely Credit Suisse, and does discuss the possibility of principal impairment.

MLPO Performance

The fund is up over +150% in the past three years:

We are comparing MLPO with the standard in the MLP space, namely the Alerian MLP ETF ( AMLP ). On a year to date basis fund flows have put MLPO in a negative territory, while AMLP is flat:

This might be due to the association with the Credit Suisse name, rather than the fund composition:

We can see from the above graph, courtesy of Morningstar, that even ETFs associated with the bank have experienced significant outflows in the past few days.

Conclusion

Credit Suisse S&P MLP Index ETN is an exchange traded note focused on Energy equities. The fund offers investors exposure to the S&P MLP Index , and has done very well in the recent past, being up over 150%. An investor needs to be aware of the vehicle's structure, which is an exchange traded note. An ETN has inherently increased risk as compared to an ETF, because it is not bankruptcy remote. An investor buying MLPO would be fully exposed to the credit risk posed by Credit Suisse. The fund does spell this out in its prospectus, and there are historical precedents of investors being caught in a restructured estate via the Lehman ETNs. A retail investor needs to be able to make the distinction between an ETF (which is bankruptcy remote) and an ETN, which gets caught up in the default risk associated with the issuer, in this case Credit Suisse.

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