Credit Suisse pays to buy A1 bond and sends ‘market message’

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The logo of Swiss bank Credit Suisse is seen at its headquarters in Zurich, Switzerland February 22, 2022. Picture taken February 22, 2022. REUTERS/Arnd Wiegmann/

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LONDON, June 17 (Reuters) – Scandal-stricken lender Credit Suisse (CSGN.S) has opted to tap investors for a more expensive dollar bond to repay a $1.5 billion issue. dollars aimed at raising capital, a move that investors said was necessary to avoid increasing concern about its ability to repay debt.

The Credit Suisse bond issue raised $1.65 billion at an interest rate of 9.75%, according to an IFR pricing sheet on Friday. A source familiar with the matter confirmed the details to Reuters.

The bond sold this week, like the one it is refinancing, is a so-called Additional Tier 1 issue – a type of contingent convertible bond (CoCo). Considered the riskiest debt banks can issue, CoCos are designed to be perpetual in nature, although banks can repay them after a set period.

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It is standard practice for banks to redeem or “call” AT1 instruments at the first opportunity, but past exceptions – notably Deutsche Bank in 2020 – imply that Credit Suisse could have done the same, instead of choosing issue another bond at a higher price.

Its new bond yields 9.75%, well above the 7.125% interest rate of the previous high-trigger convertible issue.

Some investors, however, said the choice not to repay the bond risked raising concerns that the bank might not be able to repay its debt as it faces turbulent times. Read more

“The position that CS has been in the headlines for the last year or 18 months, they probably couldn’t afford that to go wrong,” said Dillon Lancaster, portfolio manager at TwentyFour Asset Management.

“I think the first decision was to do it and I think it’s a good decision made by management in terms of bondholder friendliness. And the second was to have the ability to do it, to get the book for the new deal (refinance) the old deal.”

Lancaster estimated that had the original bond not been called, its coupon would have reset to around 8.55%, meaning the new deal cost Credit Suisse around 120 basis points more than to stick with the old.

Designed in the wake of the 2008 financial crisis, AT1 securities are intended to bolster a bank’s capital buffers and are intended to ensure that investors, rather than taxpayers, would be responsible if a bank ran into financial difficulties.

But while a bank can choose not to redeem the bond, Deutsche Bank’s decision in 2020 not to redeem its $1.25 billion AT1 bond sparked market turmoil.

It followed a similar decision in 2019 by Santander (SAN.MC).

Filippo Alloatti, chief financial officer at Federated Hermes Limited, welcomed the decision to repay the debt call, saying “it helps Credit Suisse’s credit spreads to be seen as a good corporate citizen.”

Shares of Credit Suisse closed 2% higher on Friday after the news, while shares of rival UBS (UBSG.S) were down.

Credit Suisse also said the redemption of outstanding instruments helped it simplify its AT1 capital portfolio. All of its AT1 bonds will now be structured to be amortized if the principal falls below a certain threshold, instead of being converted into shares, as was the case with the bond being redeemed.

Some also argue that borrowing costs are likely to rise in the coming months as central banks raise interest rates. Read more

Finally, for the bank battered by a series of scandals and lost profits, (the new issue) was an opportunity to send “a message to the market”, a person familiar with the matter told Reuters.

“That Credit Suisse can raise an AT1 for size…and get investors to buy Credit Suisse paper.”

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Reporting by Brenna Hughes Neghaiwi and Oliver Hirt in Zurich; additional reporting by Yoruk Bahceli in London), editing by Sujata Rao and Louise Heavens

Our standards: The Thomson Reuters Trust Principles.

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