Credit Suisse pays up to redeem A1 bond, sends ‘message to the market’

LONDON (Reuters) – Scandal-hit lender Credit score Suisse has opted to faucet traders for a pricier greenback bond with a view to repay a $1.5 billion capital-boosting challenge, a measure traders say was essential to keep away from elevating concern over its potential to pay debt.

Credit score Suisse’s bond challenge raised $1.65 billion at a 9.75% rate of interest, based on an IFR pricing sheet on Friday. A supply accustomed to the matter confirmed the small print to Reuters.

The bond bought this week, just like the one it refinances, is a so-called Further Tier 1 challenge – a sort of contingent convertible (CoCo) bond. Deemed to be essentially the most dangerous debt banks can challenge, CoCos are designed to be perpetual in nature, although banks can repay them after a specified interval.

It’s commonplace observe for banks to redeem or “name” AT1 devices on the first alternative however previous exceptions — notably Deutsche Financial institution in 2020 – suggest Credit score Suisse might have performed the identical, as an alternative of opting to challenge one other bond at a better value.

Its new bond pays 9.75%, significantly above the 7.125% rate of interest on the earlier high-trigger convertible challenge.

Some traders stated, nonetheless, that selecting to not redeem the bond risked elevating issues that the financial institution is likely to be unable to repay debt because it weathers a turbulent interval. “The place that CS has been within the headlines over the past 12 months or 18 months, they most likely could not afford this to go flawed,” Dillon Lancaster, portfolio supervisor at TwentyFour Asset Administration, stated. “I feel the primary resolution was to do it and I feel that is an excellent one made by administration when it comes to being bondholder-friendly. And the second was being able to do it, to get the guide for the brand new deal to (refinance) the previous deal.”

Lancaster estimated that had the unique bond not been referred to as, its coupon would have reset at round 8.55%, that means the brand new deal value Credit score Suisse roughly 120 foundation factors greater than sticking with the previous one.

Devised within the wake of the 2008 monetary disaster, AT1 securities purpose to bolster a financial institution’s capital buffers and purpose to make sure that traders, quite than taxpayers, could be on the hook if a financial institution bumped into monetary difficulties.

However whereas a financial institution can choose to not name the bond, Deutsche Financial institution’s 2020 resolution to not redeem its $1.25 billion in AT1 bond sparked market turmoil.

It adopted the same transfer in 2019 by Santander.

Filippo Alloatti, head of financials at Federated Hermes Restricted, welcomed the choice to redeem the debt calling, saying “it helps Credit score Suisse credit score spreads to be perceived as an excellent company citizen”.

Credit score Suisse shares closed 2% increased on Friday following the information, whereas rival UBS’ shares had been down.

Credit score Suisse additionally stated that redeeming the excellent devices helped it to simplify its AT1 capital portfolio. All its AT1 bonds will now be structured to be written off ought to capital fall beneath a sure threshold, versus being transformed into fairness, as was case with the bond now being redeemed.

Some argue too that borrowing prices are more likely to enhance in coming months as central banks increase rates of interest.

Lastly, for the financial institution battered by a string of scandals and revenue hits, (the brand new issuance) was a chance to ship “a message to the market,” one individual accustomed to the state of affairs instructed Reuters.

“That Credit score Suisse can increase an AT1 for dimension…and get traders shopping for Credit score Suisse paper.”

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