Credit Suisse on Thursday printed its first Additional Tier 1 since the bank was rocked by a series of scandals, raising US$1.65bn from a perpetual non-call 2027 transaction in a surprise refinancing of a US$1.5bn issue coming up for a call next month.
The deal is the Swiss lender's first foray into the AT1 market since a series of events that shone a light on numerous risk management failings, led to ratings agency downgrades, hammered its share price and pushed up its financing costs. The most high profile were the significant losses inflicted on the bank by the collapse of supply chain financing firm Greensill Capital and hedge fund Archegos Capital in 2021.
The bank, which issued its third profit warning of the year last week, has said 2022 will be a difficult year of transition. It is attempting to restructure – reducing risk in its investment bank and shifting more focus to wealth management – and to overhaul its culture.
The impact of those troubles were clearly evident in the price offered to investors for the deal on Thursday morning.
Sole lead Credit Suisse opened books for the 144A-registered deal just after the European open with initial price thoughts of 9.75% area.
"It's not often you see a coupon like that," said a banker away from the deal.
For comparison, Credit Suisse's last issuance in the format came in December 2020, when it priced a US$1.5bn perpetual non-call September 2030 transaction with a coupon of 4.5%. That deal was quoted at a cash price of 71.40 and a yield-to-call of 9.38% at Thursday's open, according to Tradeweb figures. Citing that deal, bankers saw fair value for the new issue in the low 9s.
The timing of the deal surprised market participants, emerging on a public holiday in many parts of Europe and coming after Additional Tier 1 products were hit hard in a dramatic risk sell-off, sparked by last Thursday's European Central Bank meeting and the publication of US CPI figures last Friday. The Bank of America CoCo index hit 7.11% on Wednesday, just shy of the 7.40% record high yield it hit in March 2020.
A relief rally in US stocks after the Federal Reserve delivered a 75bp rate hike on Wednesday provided some encouragement. The positivity was short-lived, however, and European equities tumbled on Thursday morning after the Swiss National Bank announced a surprise rate hike, while US futures indicated a reversal of yesterday's gains.
"The market has started to go quite aggressively against them, which was quite unfortunate after what seemed a decent reaction to the Fed," said a second banker.
Credit Suisse was ultimately forced to price the deal in line with IPTs at 9.75%, during US hours.
'Simplification'
The new issue is aimed at refinancing Credit Suisse's 7.125% US$1.5bn AT1, which is approaching its first call date on July 29, even though the bank will have to pay up to do so - reflecting the rates environment and the bank's elevated funding costs.
It announced on Thursday that it plans to call the note, subject to the successful completion of the new issue and approval from its regulator. It had just two weeks left to notify investors if it planned to redeem.
The 7.125% transaction was quoted at a cash price of 95.50 pre-announcement, indicating that investors had been expecting it to be extended.
The deal, which was issued in January 2017, has a reset spread of 510.8bp. Bankers calculated that at 9.75%, the new issue would price with a reset spread in the 620s.
"The ability to leverage people into the new issue at a very attractive reset and coupon should really help," said the second banker.
The note coming up for call differs in structure from the rest of Credit Suisse's AT1 stack in that the bond would be converted to equity in the event of bail-in. The new issue and all of Credit Suisse's other AT1s are structured with a permanent write-down feature. Credit Suisse said the refinancing would therefore mark a "significant simplification" of its AT1 portfolio.
The old note also features references to Libor, which issuers have sought to phase out.
Credit Suisse has been questioned on its overall capital strength after its successive losses. Reuters reported at the end of May that the bank was considering a capital increase of more than SFr1bn. Chief executive Thomas Gottstein later dismissed those reports, saying he was “very comfortable” with the current level of capital.
The bank has said it plans to operate at a group-wide Common Equity Tier 1 ratio of around 13.5%, below its 2024 target of above 14%. As of the end of the first quarter, its CET1 ratio stood at 13.8%.
Updated story: Updates to add pricing details.