Credit Suisse announces USD AT1 notes at 9.75% IPG

Credit Suisse Group AG (“CS”) announced the bank will be issuing additional tier 1 (“AT1”) USD subordinated perpetual notes at an initial price guidance (“IPG”) of 9.75%. 

The AT1 notes will be callable on 23 June 2027 and will reset on the 23 December 2027. If not called, the notes will reset at the prevailing 5Y US Treasury yield plus the initial spread. The new issue qualifies as additional tier 1 (“AT1”) capital of the issuer and entails certain loss absorption features.

The issuer is rated Baa1 (Negative) by Moody’s, BBB (stable) by S&P and BBB+ (Stable) by Fitch. As the notes will be subordinated, the expected rating for the AT1 notes will be B+ by S&P and BB by Fitch.

CS was founded in 1856 and is based in Switzerland. The group has a global reach with operations in about 40 countries. CS operates in 4 main divisions – Wealth Management, Investment Bank, Swiss Bank and Asset Management. The group is considered to be a systemically important bank by the Financial Stability Board.

For its first quarter financial results ending 31 March 2022 (“1Q22”), CS reported that net revenues fell 21% year-on-year (“yoy”) to CHF 4.31b due to decline in Investment Bank, Wealth Management and Asset Management net revenues. The group also incurred a net loss attributable to shareholders of CHF 273m in 1Q22 compared to net loss attributable to shareholders of CHF 252 in 1Q21.

In 1Q22, CS was impacted by volatile market conditions and client risk aversion. Operating expenses were higher yoy due to higher litigation expenses of CHF 703m. CS expects 2022 to be a transition year for the group as they focus on restructuring their group strategy and incur higher compensation costs than last year.

CS has been actively managing its exposure to Russia. CS reduced their net credit exposure by 56% to CHF 373m since the end of 2021. Net credit exposure to Russian financial institutions saw a 67% decrease in exposure. However, CS still saw losses of CHF 206m relating to the Russia-Ukraine crisis. The loss includes CHF 148m from trading and fair value losses and CHF 58m in provision for credit losses.

CS still maintains a sound solvency profile based on the latest quarterly results. CET1 ratio for 1Q22 is 13.8% (vs 12.2% in 1Q21), which remains well above regulatory requirements while liquidity coverage ratio was 196% in 1Q22, demonstrating a continued conservative liquidity position. Its leverage exposure was also down by CHF 11b due to the ongoing de-risking of its investment banking division, while net stable funding ratio improved slightly to 128% from 127% in 4Q21.

In terms of relative valuation, the CS 5.25% Perpetual Corp (USD) is callable in 2027 and is currently trading at an indicative yield to worst (“YTW”) of 10.56%. At an IPG of 9.75%, we find the notes attractive for its higher initial spread over the CS 5.25% perps due in 2027. As this is an AT1 note, investors should be aware that the notes come with certain loss absorption features and that the final price guidance for the new bond would likely be lower than the initial price guidance.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in CS 5.625% Perpetual Corp (SGD) and the analyst who produced this report holds a NIL position in the abovementioned securities.