Credit Suisse Bondholders Left Guessing on Archegos Capital Hit

Credit investors have been dumping the riskiest bonds issued by Credit Suisse Group AG after being left in the dark about the full scale of the hit to the bank’s capital buffers from the Archegos Capital crisis.

Some of the Swiss bank’s most subordinated notes, known as CoCos or Additional Tier 1s, have fallen more than 5 cents on the dollar since Monday.

Whether the bonds have significantly further to fall -- and at what point they become cheap enough to attract bargain hunters -- is the “million dollar question,” said Andrew Fraser, head of financial research, credit, at Aberdeen Standard Investments, which oversees 464.7 billion pounds ($640 billion).

Credit Suisse Bondholders Left Guessing on Archegos Capital Hit

The bank warned on Monday that it faces big losses tied to Archegos, a U.S. hedge fund that defaulted on margin calls. The figure may run into the billions, according to people with knowledge of the matter, while JPMorgan Chase & Co. analysts said media speculation of a $3 billion to $4 billion loss was “not an unlikely outcome.”

“Ultimately it depends on the size of the loss,” Fraser said. “Even if the number is not as big as some fear then I think the bonds will struggle to go back to Friday’s levels and trade at a discount to the sector given risk management failings.”

A spokesperson for Credit Suisse didn’t respond to a request for a comment.

Some of the bonds were better bid on Wednesday. The bank’s $2.5 billion 6.25% note, for example, gained 0.125 cents to 106.75 cents.

S&P Global Ratings downgraded its outlook on Credit Suisse to negative on Tuesday, citing concerns about the quality of risk management that could lead to “potential material losses.”

Material Losses

Knowing the extent of the damage is crucial for CoCo bondholders in particular, because coupon payments may be canceled if the bank breaches regulatory capital requirements. The Swiss regulator FINMA can also prohibit coupon payments.

Credit Suisse’s common equity tier 1 ratio, a key measure of financial strength, is 12.8% compared to a minimum requirement of 10%, according to a fixed income presentation on the bank’s website dated March 30. Its leverage ratio is 4.4% compared to a 3.5% requirement.

For now, coupon cancellation risk remains “pretty low” but the bank will need to boost its capital cushion to rebuild investor confidence, said Hank Calenti, founder and financials credit analyst at CreditContinuum Ltd, an independent research provider. He estimates the bank may need as much as 8 billion Swiss francs ($8.5 billion) of additional capital to restore its buffer to a level that’s competitive with peers.

“It is too early to consider this a buying opportunity,” he said. “The flames are rising, and more fuel could be added before the capital blanket is applied. As such, we believe CS’s bonds may continue to lag those of its peers.”

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