CREDIT Suisse has tapped its investors for an extra SFr6bn (£3.85bn) by issuing contingent convertible bonds (co-cos), in order to get halfway towards Switzerland’s new capital requirements.
The issuance could herald a new era of popularity for co-cos on the back of regulators’ enthusiasm for the instruments. The buyers in the Credit Suisse deal are state-backed investment firm Qatar Holding, which will buy $3.5bn at a 9.5 per cent interest rate, and the Olayan Group, which will buy SFr2.5bn at nine per cent.
Credit Suisse was not able to say what premium it had to pay in order to issue the three-year notes, which convert into equity if the bank’s core tier one capital ratio falls below seven per cent under Basel III definitions.
Co-co issuers must pay a premium because bondholders are loath to see their assets convert into non-interest-paying equity. They can also be hard to sell, because they don’t fit into traditional investment models balancing equity and bonds, but straddle the two.
“There’s always been the question of who will buy these,” said Adam Farlow of law firm Baker & McKenzie .
But with Basel III increasing banks’ capital requirements and narrowing down the definition of loss-absorbing capital, many institutions are turning to co-cos to meet the rules.
“A lot of banks had not been keen to do it because of uncertainty under Basel III,” said Georg Schroeder a partner accountants Deloitte. A clarification of the rules on 13 January, however, saw Rabobank take the plunge, now followed by Credit Suisse.
Co-co financing deals are now reportedly being shopped around the City by advisory firms, particularly by UBS and Bank of America/Merrill Lynch, both of which advised on Lloyds’ 2009 co-cos deal.