Sunday, 20 January 2019

I should CoCo

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A thoughtful and popular issuer, Credit Suisse has established itself with investors across markets and asset classes, as evidenced by its issuing patterns over the past year. While one transaction in particular deserves the biggest share of the limelight, it has been a consistently strong borrower and has once again burnished its credentials as a favoured name across borders. Matthew Attwood reports.

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Credit Suisse added a new chapter to the hybrid capital rule book in February this year with its US$2bn 30-year non-call 5.5 Tier 2 transaction, dubbed Buffer Capital Notes by the issuer. Everyone else called them CoCos, as this was the first public, non-coercive example of that much-vaunted new asset class.

Priced at 7.875%, the deal converts into equity upon breach of a 7% Core Tier 1 capital trigger. It was immediately preceded by the private placement of US$6.2bn of Tier 1 Buffer Capital Notes, also convertible into equity on breach of a trigger. This was a nimble move: priced at 9.5% and 9%, that exercise capped the cost to Credit Suisse of the public Tier 2 notes.

“If we hadn’t had the private placement, we could have had investors reflecting interest at coupons in excess of 10%,” said Andy Young, head of fixed income syndicate, financials institutions at Credit Suisse, at the time.

Market participants elsewhere were unanimously positive about the exercise, which was seen as a first. The two previous transactions with the “CoCo” tag were deemed to be one-offs: the Lloyds ECN deal in 2009 was part of a forced exchange and Rabobank’s Senior Contingent Note the following year did not have an equity convergence feature. Rabo’s special status as a Triple A bank also called into question its deal’s usefulness as a precedent.

“Credit Suisse is one of the banks in the bucket below Rabo,” said one FIG DCM banker shortly after the deal priced. “They’re not by any means second-tier but it reflects what a Deutsche Bank, a BNP or an HSBC could achieve. Whenever those types of banks look at this kind of structure, they now at least have a real pricing reference, which will be a one-step process rather than the two or three-step one of extrapolating a price from Rabo or Lloyds.”

The deal’s oversubscription rate – in excess of 10 times – proved that a bid exists for the asset class, demonstrating that investors had taken notice of changes to the regulatory landscape for hybrid capital. While the Swiss regulator was the first to offer clarity on its new capital requirements, providing a clear rationale for the Credit Suisse exercise, the deal was seen as an important test of investor sentiment.

“Old-style hybrid capital will lose its effectiveness and eventually be replaced because of its limited loss-absorption during the financial crisis,” said Chris Tuffey, managing director and head of syndicate at Credit Suisse. “Given the response to this issue, I’m reassured that investors are looking to CoCos as a direct alternative.”

A previous highlight for Credit Suisse as an issuer of capital came in July last year, when it placed US$1.5bn of perpetual non-call five paper, aimed primarily at private banking networks in Asia and Switzerland. Initial talk was in the mid-8% area but this was progressively tightened during the marketing period, with the transaction eventually pricing at 7.875%, tighter than deals in the same format launched by other illustrious issuers such as Credit Agricole and SG.

Earlier in the period, Credit Suisse was active in the senior sector in euros, pricing €1.4bn of three-year floating-rate paper last June, which it followed with a €550m reopening of its €2bn 4.75% August 2019 fixed-rate deal launched the previous year. The latter exercise was designed to satisfy investors unable to participate in the FRN.

Further activity in senior format followed in August, this time with the US investor base in the borrower’s sights for a US$2bn 10-year transaction which was two times oversubscribed. Another euro-denominated senior deal followed in September, when Credit Suisse plugged a gap in its curve between May 2014 and January 2017 with a five-year trade. The €1.75bn bond attracted orders in excess of €2.2bn from more than 180 accounts. In January this year, the bank was back in dollars, successfully negotiating a full pipeline of Yankee issuers to price US$2bn if three-year fixed and floating-rate paper.

A notable first for the bank came in November last year, with its inaugural covered bond issue, a €1.25bn five-year exercise which attracted €1.7bn of orders despite less than propitious conditions for an issue in the wider market. Onlookers said the deal’s success in those circumstances was a testament to the issuer’s loyal following.

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