Credit Suisse will issue six billion Swiss francs (£3.8bn) of contingent convertible capital bonds (CoCos) to two Middle Eastern investors, a move towards satisfying tougher Swiss capital rules.
Under the new rules, Switzerland's two biggest banks UBS and Credit Suisse will have to issue CoCos, which convert into equity under certain conditions such as if a bank's capital ratio falls below a certain trigger point.
Although Swiss regulators see CoCos as good instruments to avoid government bailouts of large financial institutions in a crisis, some bankers have voiced doubts about the feasibility of creating a market for these instruments.
"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," Credit Suisse chief executive Brady Dougan said on Monday.
"We believe that it will put to rest concerns about the attractiveness of these instruments to investors," he said.
Qatar Holding LLC and The Olayan Group will take up the CoCos to be paid up no earlier than October 2013.
The CoCos will be issued in exchange for hybrid capital with higher coupons issued in 2008 currently held by the two investors, Credit Suisse said.
"With this exchange, we will satisfy an estimated 50 per cent of our high-trigger contingent capital requirement set by FINMA," Dougan also said.
The bonds will be converted into Credit Suisse Group ordinary shares if the Group's reported Basel III common equity Tier 1 ratio falls below seven per cent, Credit Suisse said.
They will also be converted if FINMA determines that Credit Suisse Group requires public sector support to prevent it from becoming insolvent, bankrupt or unable to pay a material amount of its debts, or other similar circumstances, they said.
Ratings agency S&P has said banks globally may need to raise as much as $1 trillion of CoCo-style capital in the next 5-10 years, making a strong investor base essential.
City A.M. Reporter