Francesca Volpi/Bloomberg
A Credit Suisse Group AG bond category warns that a liquidity lifeline from the Swiss central bank may not be enough to stabilize the distressed lender.
The bank’s holding company has nearly 76 billion Swiss francs ($82 billion) of rescue in additional senior bonds and tier 1 notes trading at difficulty levels. If the regulator steps in to protect Credit Suisse depositors, the AT1s would be cancelled, while the senior holding company’s debt subject to bail would be reduced. converted to capital, according to Finma, which regulates banks in Switzerland. AT1s can also be redeemed if the bank’s capital ratio falls below a predetermined level.
bail-in-able European and Swiss authorities introduced the bonds after the euro zone debt crisis to ensure taxpayers are not forced to bail out a bank before investors suffer first. AT1s were introduced after the global financial crisis, after earlier types of capital proved incapable of acting as a buffer.
Senior bonds amenable to bail-in rose on Friday but are still deeply in trouble, with a 2.125% note due October 2026 trading at 66 cents per euro. Bonds issued by Credit Suisse that are protected against such losses, and some of which are also part of a repurchase offer, also rose on Friday, with a 1.5% bond due April 2026 trading at just under 82 cents per euro.
“Credit Suisse’s bond prices reflect a high perceived probability of some type of resolution, resulting in losses for bondholders,” said Jeroen Julius, a senior credit analyst at Bloomberg Intelligence.
Much of the lender’s dollar-denominated debt also rose on Friday. Its 1.305% bond due 2027, among the bonds that lost the most this week, was trading four cents higher at 64 cents on the dollar as of 1:12 p.m. in New York.
Shares of Credit Suisse fell on Friday, capping a volatile week in which the lender’s shares fell 25% and its bonds plunged to distressed levels. The cost of insuring the lender’s debt against short-term default rose again on Friday to around 3,000 basis points, according to CMAQ prices, though liquidity is spotty.
“The widening of the senior call spread reflects concerns in the markets about the health of the bank,” said Suvi Platerink Kosonen, a senior credit analyst at ING Bank.
A bailout could happen if the central bank’s liquidity provision is deemed insufficient, or if the Swiss government demands an immediate solution to protect the bank’s domestic banking business that may result in a breakup of the group, according to Bloomberg Intelligence’s Julius.
The bank has 35 billion Swiss francs of CET1 capital which would be the first buffer in any intervention scenario, followed by 16 billion francs of AT1 debt, before reaching 59.8 billion francs of senior holding company debt that they can rescue Credit Suisse also has a small number of older tier two notes that may be affected.
A Credit Suisse spokesman declined to comment on the bailout bonds, but noted recent statements about plans to increase liquidity and buy back bonds. He also highlighted statements by support of the Saudi National Bank and swiss authorities, who said Credit Suisse meets the highest capital and liquidity requirements applicable to systemically important banks. President Axel Lehmann said Wednesday that government assistance “is not an issue.”
Safer bond buying
Some Credit Suisse creditors were actually buying the lender’s safer bonds, seeing a buying opportunity created by Swiss central bank intervention, people with knowledge of the matter said.
These investors are now buying Credit Suisse bonds issued through its operating company, the most important part of the capital structure, said the people, who asked not to be named because they are not authorized to discuss the matter. They believe debt will carry less risk than lower-tier securities if regulators step in to protect depositors.
“Credit Suisse is well capitalized and its liquidity ratio is well above regulatory minimums,” said John Taylor, European portfolio manager at AllianceBernstein. “It is a question of whether the market regains confidence and there is no outflow of deposits.”
Credit Suisse’s capital ratio has been well above the 7% threshold that would trigger a cancellation of the AT1 notes. At the end of 2022, it had a CET1 ratio, which measures a lender’s capital against risk-weighted assets, of 14.1%, and the bank said in a presentation to investors this week that it targets a ratio of at minus 13.5% through 2025.
The main resolution strategy of the Swiss market regulator for the main banks in Switzerland is through a “single entry pointbail-in, conducted only by the house supervisor, according to their website. Under this type of plan, the bail-in bonds issued by the holding company of the group are converted into shares.
For now, investors, nervous about the recent demise of three US banks, are nervously watching developments with the bank and the broader sector. Analysts at Keefe, Bruyette & Woods said this week that liquidity support from the Swiss central bank is buying time, but that the most likely solution is a Credit Suisse breakup.
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