Credit Suisse has begun marketing a collateralized debt obligation backed by equity-default swaps featuring a coupon increase if the CDO is not called after three years. The firm has issued a string of CDOs referencing equity-default swaps, but this is the first with a coupon that steps up. The firm hopes this addition will bring new investors to the structure.
The five-year deal, called EOS, is being marketed globally and Credit Suisse hopes to raise around USD200 million. It is callable after three years but if it is not called, the coupon steps up by 35%.
Equity-default swaps are essentially deep out-of-the-money put options. A drop in an underlying entity's share price of 35% triggers payment of 40% of the stock's original value to Credit Suisse from the CDO which sold the protection.
EOS will reference a portfolio of about 80 global stocks that will be split between long and short positions, an official said. After the three-year point, the short positions will be sold off.
Equity-default swaps were much hyped in 2004 but have seen limited trading volumes. Credit Suisse has been one of the only firms that has come to market with EDS-backed CDOs. A Credit Suisse official pointed to a joint-venture between the Credit Suisse equity derivatives and credit trading desks as the reason that the firm has been successful in printing the deals.
Moody's Investors Service has assigned ratings of between AAA and Baa2 to the CDO notes. Pricing details have not yet been fixed.
