These Credit Suisse bonds signal the bank's $54 Billion lifeline may not be enough

Francesca Volpi/Bloomberg

A category of Credit Suisse Group AG bonds is warning that a liquidity lifeline from Switzerland's central bank may not be enough to stabilize the embattled lender.

The bank's holding company has almost 76 billion Swiss francs ($82 billion) of bail-in senior bonds and additional tier 1 notes that are trading at distressed levels. If the regulator steps in to protect Credit Suisse's depositors, the AT1s would be written off while bail-in-able senior holding company debt would be converted to equity, according to Finma, which regulates banks in Switzerland. AT1s can also be written down if the bank's capital ratio falls below a predetermined level.

Bail-in-able bonds were introduced by European and Swiss authorities after the euro-area debt crisis to ensure that taxpayers wouldn't be on the hook for a bank rescue before investors take a hit first. AT1s were introduced after the global financial crisis, after previous types of capital proved incapable of acting as shock absorbers.

Bail-in-able senior bonds rose on Friday, but are still deeply in distressed territory, with a 2.125% note due October 2026 trading at 66 cents on the euro. Bonds issued by Credit Suisse that are ring-fenced from such losses — and some of which are also part of a buyback offer — also edged higher Friday, with a 1.5% bond due in April 2026 trading at just under 82 cents on the euro.

"Credit Suisse's bond prices reflect a high perceived probability of some sort of resolution, resulting in losses for bondholders," said Jeroen Julius, a senior credit analyst at Bloomberg Intelligence.

Many of the lender's dollar-denominated debt also rose on Friday. Its 1.305% bond due 2027, which is among the bonds that lost most this week, traded four cents higher at 64 cents on the dollar as of 1:12 p.m. in New York.

Credit Suisse shares were lower on Friday, capping off a volatile week that saw the lender's stock drop 25% and its bonds plunge to distressed levels. The cost to insure debt in the lender against near-term default rose again on Friday to around 3,000 basis points, based on CMAQ pricing, although liquidity is choppy.

"The bail-in senior spread widening reflects markets worries over the health of the bank," said Suvi Platerink Kosonen, a senior credit analyst at ING Bank.

A bail-in could happen if the central bank's liquidity provision is deemed to be 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 that would be the first buffer in any intervention scenario, followed by the 16 billion francs of AT1 debt, before the 59.8 billion francs of bail-in-able senior holding company debt would be hit. Credit Suisse also has a small amount of older tier two notes that may be affected.

A Credit Suisse spokesman declined to comment on the bail-in bonds, but pointed to recent statements regarding plans to raise liquidity and buy back bonds. He also highlighted statements of support from Saudi National Bank and from Swiss authorities, who said that Credit Suisse meets the higher capital and liquidity requirements applicable to systemically important banks. Chairman Axel Lehmann said on Wednesday that government assistance "isn't a topic." 

Safer Bond Buying

Some Credit Suisse creditors were actually buying the lender's safest bonds, seeing a buying opportunity created by the intervention of the Swiss central bank, people with knowledge of the matter said. 

These investors are now buying Credit Suisse bonds issued via its operating company, the most senior part of the capital structure, said the people, who asked not to be named because they're not authorized to speak on the matter. They believe the debt will carry less risk than lower-tier securities should regulators step in to protect depositors.

"Credit Suisse is well capitalized and its liquidity ratio is well above regulatory minimums," said John Taylor, a European portfolio manager at AllianceBernstein. "It's a question of whether the market regains confidence and there isn't deposit outflow."

Credit Suisse's capital ratio has been well above the 7% threshold that would trigger a write-off of 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 aims for a ratio of at least 13.5% through 2025.

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The Swiss market regulator's primary resolution strategy for Switzerland's major banks is via a "single point of entry" bail-in, carried out by the home supervisor alone, according to its website. Under this type of plan, the bail-in bonds issued by the group holding company are converted into equity.

For now, investors put on edge by the recent demise of three U.S. banks are nervously watching developments with the bank and the wider sector. Analysts at Keefe, Bruyette & Woods said this week that the Swiss central bank's liquidity backstop buys time but a breakup of Credit Suisse is the most likely solution.

—With assistance from Josyana Joshua.