Credit Suisse says it just gave the latent CoCo market a $6.2bn shot in the arm.
On Monday morning the Swiss bank announced it would issue Chf 6bn ($6.2bn) of Contingent Convertible securities — or debt that will convert into equity once a certain trigger is reached. In this case the trigger is if Credit Suisse’s reported Basel III common equity Tier 1 ratio falls below 7 per cent, or if the Swiss regulator thinks that the bank requires public support. The CoCos therefore look like they satisfy both Finma and Basel’s ideas of when CoCos should convert. Qatar Holding LLC and Saudi Arabian conglomerate, the Olayan Group, are the investors in the new CoCo issue.
Interestingly, Credit Suisse appears to have gone the ‘high’ trigger route with that 7 per cent conversion figure — rather than issue the low-trigger CoCos (which would convert once ratios hit 5 per cent) also mentioned by Finma. Competitor UBS had indicated unwillingness to issue the high trigger CoCos, and these types of ‘high’ convertibles might be quite a big deal given Swiss banks’ volatile balance sheets.
Anyway, here’s Credit Suisse CEO Brady Dougan (who’s been cuckoo-for-CoCos for some time now) commenting on the $6.2bn issue on Monday:
“The completion of a transaction of this size supports our conviction that contingent capital can be a material source of capital for the banking industry and, in addition, that this will be an attractive instrument for the large group of current investors who hold existing hybrid capital instruments. We see this transaction as a significant development for Credit Suisse Group and our industry as we believe that it will put to rest concerns about the attractiveness of these instruments to investors. This is one of a number of steps we have taken to ensure that we are at the forefront of industry developments and it underscores our commitment to creating a sustainable business model for the new environment.”
Finding investors for CoCos is always the key — and it’s worth noting that this is a private deal that will see Credit Suisse issue CoCos to Qatar and Olayan in exchange for cash or for Tier 1 (i.e. hybrid) capital notes issued in 2008. Hybrid debt, we know by now, is on its way out as a regulator-recognised form of bank capital. And Qatar and Olayan were the same strategic investors that supported Credit Suisse during its October 2008 capital raising including hybrid securities with a five-year call.
Here’s Evolution Securities’ head of fixed income Gary Jenkins (who’s been sceptical of a big market for CoCos for some time now) making the point:
This announcement may well give the market some confidence that contingent capital or Cocos will become a substantial part of bank capital and that there will be sufficient demand for the product from investors. If it does develop into a proper market then it would be good news for senior debt as clearly it would offer a further level of protection against losses. Obviously this is a private deal which might well be the best way for this market to kick off and certainly in a low yield environment one can see the attractiveness of this kind of paper from a strong bank. Whilst the real test for Cocos in the future would be public deals from a range of banks which are utilized to raise new, rather than replace existing, debt it is possible that exchanging existing hybrid paper that has a diminishing contribution to capital ratios for Cocos may be how the market initially develops.
Related link:
An accounting boost for CoCos - FT Alphaville