Credit Suisse to Delist But Not Liquidate Three ETNs
Credit Suisse (CS) announced its intent to delist three of its ELEMENTS brand ETN products. The last day of trading is expected to be “on or about” April 3, 2009.
The affected securities are:
- Elements MLCX Gold Index ETN (GOE)
- Elements MLCX Livestock Index ETN (LSO)
- Elements MLCX Precious Metals Index ETN (PMY)
The delisting comes as no surprise. It’s what’s missing from the announcement that is shocking – there is no liquidation plan.
The background story on this is one of the more interesting tales in the ETF world. Recent trading in GOE has been strange enough to draw the attention of the NYSE.
I issued a “Sell” on GOE on March 9 at a price of $114.90 while the indicative value (NAV) was $10.90. It was trading at a 1,000% premium, and Credit Suisse informed me they were not planning to issue any more shares and that the market maker was out of inventory.
LSO and PMY also have some trading problems, but not to the degree of GOE. Fifteen minutes prior to today’s close, LSO had a bid of $8.00, an ask of $8.09, and an indicative value of $7.94 (rather reasonable for an ETN with only 100 shares traded). At the same time, PMY had a bid of $7.46, ask of $8.54, and indicative value of $7.77. A bid/ask spread of more than 14% with the last trade at a 9.9% premium.
As for not liquidating and closing these ETNs, Credit Suisse says it will publish bids on its website, but reminds us that it is not required to do so and could cease the practice at any time. Credit Suisse also reiterated its intent not to issue any additional shares.
So, why is Credit Suisse taking all these convoluted steps? They won’t say, but here is my opinion: I believe they did not fully appreciate the process of shutting down an ETN in an orderly manner. As a result, they stopped issuing new shares prematurely. An orderly closure and liquidation requires the ongoing presence of a market maker (or authorized participant) who can create and redeem shares as necessary.
In the case of GOE, investor demand increased to the point that the shares took on a life of their own. The price was moving up, and then momentum players jumped on board and pushed it even higher. In the absence of any statement from Credit Suisse, many traders were unaware that it was no longer subject to the normal ETF/ETN in-kind redemption practice.
I further suspect that the lack of a closure announcement is Credit Suisse’s attempt to fix the problem they created. By posting bids on their website, they can potentially retire the outstanding shares and eventually close the fund. In the meantime, current share holders are now in a race to see who can get out at the best price before GOE collapses back to its indicative value.
Oh yes, the recent Credit Suisse announcement also contained another oddity. They said the delisting would not involve Elements Credit Suisse Global Warming ETN (GWO), even though it hasn’t traded for five days and is on DeathWatch. However, they reserve their right to change their mind.
Stay tuned – this story is far from over.
Disclosure: no positions