Credit Suisse Group AG's investment bank has found a new way to reduce the risk of losses from about $5 billion of its most illiquid loans and bonds: using them to pay employees' year-end bonuses.
The bank will use leveraged loans and commercial mortgage-backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.
"While the solution we have come up with may not be ideal for everyone, we believe it strikes the appropriate balance among the interests of our employees, shareholders and regulators and helps position us well for 2009," Chief Executive Officer Brady Dougan and Paul Calello, CEO of the investment bank, said in the memo.
The securities will be placed into a so-called Partner Asset Facility, and affected employees at the bank, Switzerland's second biggest, will be given stakes in the facility as part of their pay. Bonuses will take the first hit should the securities decline further in value.
Credit Suisse said earlier this month it would eliminate 5,300 jobs and cancel bonuses for top executives after it had about 3 billion Swiss francs ($2.8 billion) of losses in October and November. Unlike larger Swiss rival UBS AG, Credit Suisse hasn't received a government rescue. Banks and securities firms are struggling to pay employee bonuses after taking more than $800 billion of losses on mortgages and corporate loans.
Credit Suisse is the first to use the debt to pay employees.
Outside investors may also be permitted to invest in the facility, according to the people familiar with the matter, who declined to be identified because the plan hasn't been made public. The bank will boost the potential for returns by providing leverage to the facility, and will be paid back first, according to the people.
Leveraged-loan commitments on Credit Suisse's books fell to between 2.5 billion Swiss francs and 3 billion francs by the end of November from 11.9 billion francs at the end of September, Dougan said on a conference call on Dec. 4. He said the bank had also "somewhat reduced" its commercial real estate positions.
Credit Suisse had 12.8 billion francs in commercial mortgages at the end of September.
Assets in the facility will remain on Credit Suisse's balance sheet and will be held in the company's fund management division, the people familiar with the plan said. The new structure will mean that any mark-to-market losses or gains on the assets will be offset by identical gains, or losses, on the bank's liability to employees.
Employees will receive semi-annual coupon payments on their investment in the Partner Asset Facility at the London Interbank Offered Rate plus 2.50 percentage points. The ultimate value of the facility will be determined over the next eight years as the loans and securities mature or default, the people said.
"Cash payments representing distributions of a portion of the award may be made to participants in the future contingent on the performance of the underlying assets," Dougan and Calello said in the memo. "Cash distributions will not be made for several years."
The bank said it expects to begin annual payments after five years.
While Credit Suisse doesn't say how many managing directors and directors work at the investment bank, the number is in the thousands.
Credit Suisse said it will also change the cash portion of bonuses for all of the bank's managing directors and for directors in the investment bank. Under the new system, the bank will have the right to recoup some of the cash bonus in the two years after it's paid if an employee resigns.