Credit Suisse Plans Capital Bonds as Risk Approaches 4-Year Low

Credit Suisse Group AG (CSGN) and Barclays Plc (BARC) are planning to sell junior bonds that meet new bank capital regulations as they seek to take advantage of demand for higher-yielding securities.

Switzerland’s second-biggest lender is meeting investors from today for a debut sale of additional Tier 1 bonds in dollars, while Barclays hired banks to arrange a sale of the junior notes in euros, people familiar with the plans said. A benchmark gauge of subordinated European bank debt approached the lowest since March 2010.

Lenders in the region are benefiting from investor demand for riskier debt as central banks hold interest rates at record lows. Additional Tier 1 securities offer higher coupons because they’re designed to absorb losses, helping lenders comply with new Basel III capital rules.

“People are searching for yield and for the moment are willing to buy risky deals from the banks,” said Robert Montague, a credit analyst at ECM Asset Management Ltd. in London. “There’s been a bit of a rush by the banks recently, which might make some people a little worried.”

Credit Suisse will be the sixth European bank to sell contingent convertible bonds as part of its most-junior layer of debt capital, according to data compiled by Bloomberg. Lenders including Spain’s Banco Popular Espanol SA (POP) and France’s Societe Generale SA (GLE) issued a total $6.4 billion of additional Tier 1 securities since Banco Bilbao Vizcaya Argentaria SA (BBVA) debuted the notes in May, the data show.

Photographer: Gianluca Colla/Bloomberg

Credit Suisse will be the sixth European bank to sell contingent convertible bonds as part of its most-junior layer of debt capital, according to data compiled by Bloomberg. Close

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Photographer: Gianluca Colla/Bloomberg

Credit Suisse will be the sixth European bank to sell contingent convertible bonds as part of its most-junior layer of debt capital, according to data compiled by Bloomberg.

High Coupons

The lowest coupon offered so far is 8.25 percent, when Barclays sold $2 billion of the undated notes last month and Societe Generale issued $1.25 billion in August. Banco Popular, the only lender to have issued in euros, is paying 11.5 percent on the 500 million euros ($677 million) of bonds it sold in October, data compiled by Bloomberg show.

Banks are rearranging their capital structures to include buffers that can be used to cushion against losses, restore the issuer as a going concern, or fund its winding up without relying on taxpayers. Additional Tier 1 bonds are written off or convert to equity when a lender’s core capital ratio falls below a certain percentage of risk-weighted assets.

Barclays and Credit Suisse are seeking to issue the securities as borrowing costs fall. The average premium investors demand to hold junior subordinated financial notes instead of government bonds fell to 368 basis points, the lowest since February 2008, according to Bank of America Merrill Lynch index data.

Risk Appetite

The cost of insuring subordinated debt against losses also dropped, with the Markit iTraxx Subordinated Financial index of credit-default swaps linked to 25 European banks falling 2.4 basis points to 145 basis points at 3:01 p.m. in London.

“If you’ve a deal to sell and you don’t do it this week or next, you can probably forget it until the first quarter,” said Chris Bowie, the London-based head of credit portfolio management at Ignis Asset Management Ltd., which oversees about $104 billion. “People are open to risk now but things can look quite different on Jan. 1.”

In the new issue market today, Astaldi SpA (AST), a Rome-based engineering and construction company, added 100 million euros to its 500 million euros of 7.125 percent bonds issued last week, according to a person familiar with the matter. The new seven-year notes yield 6.716 percent and are provisionally rated B1 by Moody’s Investors Service, four levels below investment grade.

German fertilizer maker K&S AG (SDF) is marketing 500 million euros of five-year bonds that will be priced to yield 210 basis points more than the mid-swap rate and 500 million euros of eight-year notes to yield a spread of 250 basis points, according to a person with knowledge of the deal. The securities may be rated Ba1 or one level below investment grade at Moody’s.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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