Credit Suisse is issuing contingent capital:
The bank agreed to sell $3.5 billion of contingent convertibles with a coupon of 9.5 percent, and 2.5 billion francs with a coupon of 9 percent, it said. The sale will happen no earlier than October 2013, which is the first call date on $3.5 billion of 11 percent and 2.5 billion francs of 10 percent Tier 1 capital notes the bank sold in 2008.
The notes will convert into shares if the bank’s Basel III common equity Tier 1 ratio falls below 7 percent. The conversion price will be the higher of the floor price of $20 or 20 francs per share or the daily weighted average sale price of ordinary shares over the trading period preceding the notice of conversion, the bank said.
The transaction is subject to the implementation of Swiss regulations and the approval of shareholders, the bank said. The Swiss committee proposed that the country’s two biggest banks should hold common equity equal to at least 10 percent of their assets, weighted according to risks. In addition, the companies may hold up to 3 percent in so-called high-trigger CoCos that would convert into shares if the bank’s common equity ratio falls below 7 percent, plus 6 percent in CoCos that would convert at a 5 percent trigger.
Credit Suisse said the 6 billion-franc sale would satisfy about 50 percent of the high-trigger requirement. The bank said it would like to see the market for contingent convertible bonds expand to a wider group of buyers and is pursuing an additional offering of such notes to potential investors outside the U.S. and certain other countries.
On the positive side, conversion occurs well before the the point of non-viability. On the negative – the trigger is based on Capital Ratios, which I have strongly criticized in the past and continue to criticize.
The Financial Times comments:
Switzerland’s other big bank, UBS, takes a diametrically opposed view to Credit Suisse, on cocos, arguing that they will be excessively expensive because no one knows how to price them properly. UBS prefers the “haircut bond” as an instrument.
But investors believe that other UK banks, such as HSBC, could be drawn to cocos. “That would really seal cocos’ reputation,” said one London-based investor. “But in the meantime, we expect the Nordics, particularly Sweden, to be big issuers. We also think this will take off in the US.” In spite of a lack of enthusiasm from US regulators, the likes of Morgan Stanley and Goldman Sachs are privately intrigued by cocos.
Senior bankers at BNP and Société Générale have similarly signalled a willingness to consider coco issuance to finance buffers. Analysts at Barclays Capital said the market for European cocos alone could be close to €700bn ($945bn) by 2018.
Many traditional fixed-income investors are barred from owning instruments such as cocos that can convert into equity.
Update, 2011-2-23: The deal was a huge success:
Investors rushed to take up the benchmark issue by Credit Suisse of a new financial instrument hailed by regulators as a key tool for rebuilding the capital strength of banks, placing orders of $22bn – 11 times the $2bn on offer.
The deluge of orders represented a big vote of confidence in the nascent market for contingent capital bonds, dubbed cocos.
…
Asset managers took about two-thirds of Credit Suisse’s cocos, while private banks took a third on behalf of their clients. A total of 550 different investors – an unusually large number – put in orders for the bonds. The strong demand from asset managers was particularly important since they will form the backbone of any sustainable market for the products.Credit Suisse’s deal was helped by the fact the bank anchored its coco deal by simultaneously announcing a agreement to swap $6.2bn of its existing hybrid debt for cocos – covering in one go about half the total cocos the bank needs to issue.