An ETN Credit Risk Checkup

October 13, 2011


As the European sovereign debt crisis continues, all the major ETN backers have seen rallies in the prices of credit default swaps traded on their debt.

The most striking however, is that of Morgan Stanley which rose more than tenfold since early summer and surpassed our threshold of 500 bps, above which we start paying close attention. To quickly review, Morgan Stanley is rumored to be exposed to French banks, which themselves hold significant amounts of Greek sovereign debt.

This tenfold rise, which basically means that someone holding $1 million of Morgan Stanley’s one-year debt will have to pay over 6% percent a year, or $60,000, to insure it, should be a wakeup call to those holding Van Eck ETNs backed by Morgan Stanley. Among them are the Market Vectors Chinese Renminbi ETN (NYSEArca: CNY) or the Market Vectors Double Short Euro ETN (NYSEArca: DRR).

Though it seems that holding securities shorting the euro or giving you access to the Chinese renminbi may help you weather the crisis—the fact that Morgan Stanley might be overexposed to the crisis directly affects the value of your securities.

Even in the case where credit-rating agencies are proactive in downgrading debt, investors should still be cautious.

Despite the lack of readily available data on RBS one-year CDS rates between July and September, one can still note that the recent levels of rates are still significantly higher than those last reported in July.

Even though Moody’s was quick to downgrade RBS’s debt, this came nearly two weeks after the cost to insure RBS’s debt was in the range of 280-300 basis point, up from around 126 in early July.

Backing Issuer Total ETN
AUM ($, MM)
Barclays 6,938.67
JP Morgan 2,884.17
Swedish Export Credit Corp-SEK 1,336.02
Deutsche Bank 1,223.88
Credit Suisse 871.41
UBS 823.09
Morgan Stanley 197.31
RBS 92.49
Goldman Sachs 71.08
HSBC 36.70
Citigroup 19.25

On the macro scale, Morgan Stanley is still a smaller player in the ETN space. As shown above, Barclays is the dominant force. Regardless, as the markets continue in uncertainty, investors should take note of their exposure behind the scenes.


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