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Credit Suisse Agrees to Sell $6.2 Billion of CoCos

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“We have worked in close cooperation with our primary regulator, Finma, to ensure that the buffer capital notes will qualify under the future Swiss capital rules as contingent capital,” Chief Executive Officer Brady Dougan said in the statement. Photographer: Gianluca Colla/Bloomberg
“We have worked in close cooperation with our primary regulator, Finma, to ensure that the buffer capital notes will qualify under the future Swiss capital rules as contingent capital,” Chief Executive Officer Brady Dougan said in the statement. Photographer: Gianluca Colla/Bloomberg

Feb. 14 (Bloomberg) -- Credit Suisse Group AG, Switzerland’s second-biggest bank, agreed to sell about 6 billion Swiss francs ($6.17 billion) of contingent convertible bonds to existing shareholders in Qatar and Saudi Arabia.

The notes will be issued to Qatar Holding LLC and The Olayan Group no earlier than October 2013, in exchange for cash or Tier 1 capital notes the bank sold to the investors in 2008, the Zurich-based company said in an e-mailed statement today. Credit Suisse rose as much as 3.8 percent in Swiss trading.

A Swiss government-appointed committee proposed in October that UBS AG and Credit Suisse, the country’s biggest banks, should hold almost double the capital required under the Basel III rules and use contingent convertible bonds to satisfy part of the requirement. The so-called CoCos automatically become equity when reserves fall below preset levels.

“It’s certainly positive to see that there is a market for these bonds, which has been put in doubt before,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “It is strange, though, that Credit Suisse felt the need to do this now, before any guidelines about these instruments have been finalized. It looks like they came under time pressure.”

Banks may struggle to raise the more than $1 trillion in contingent convertible bonds needed to replace existing capital securities over the next five to 10 years, Standard & Poor’s said in a Dec. 9 report. Some investors have said CoCos won’t sell because they inflict losses on holders in a crisis.

Separate Sale

Credit Suisse 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. The bank will hold investor presentations this week, people familiar with the matter said, in what would be the first test of incremental demand among outside investors for such securities by a publicly traded lender.

The bank cut its 2010 dividend by 35 percent last week and lowered its target for return on equity in the next three to five years to more than 15 percent from more than 18 percent previously in response to stricter capital rules, which take effect in 2019.

Credit Suisse climbed 1.22 francs, or 2.9 percent, to 42.82 francs by 1:58 p.m. in Zurich, after dropping 5.4 percent last week. The stock is up 14 percent this year, compared with a 20 percent gain in UBS and a 12 percent increase in the 48-company Bloomberg Europe Banks and Financial Services Index.

Confidence to Market

“We have worked in close cooperation with our primary regulator, Finma, to ensure that the buffer capital notes will qualify under the future Swiss capital rules as contingent capital,” Chief Executive Officer Brady Dougan, 51, said in the statement.

“This announcement may well give the market some confidence that contingent capital, or CoCos, will become a substantial part of bank capital and that there will be sufficient demand for the product from investors,” Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London, wrote in a client note today. “If it does develop into a proper market then it would be good news for senior debt as clearly it would offer a further level of protection against losses.”

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.

High Trigger

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.

Qatar, Saudi Arabia

Qatar and Olayan of Saudi Arabia were among investors that Credit Suisse tapped for 10 billion francs in October 2008. Qatar Investment Authority, an affiliate of Qatar Holding, has a 6.17 percent stake in Credit Suisse, while Olayan owns 6.61 percent through Crescent Holding GmbH, according to data compiled by Bloomberg.

“Qatar Holding sees this transaction as an enhancement to our existing investment, and we believe it will support our objective of generating long-term stable returns,” CEO Ahmad Al-Sayed said in the statement.

Aziz R. D. Syriani, 68, the CEO of Olayan Group, has been a member of Credit Suisse’s board of directors since 1998. Jassim Bin Hamad J.J. Al Thani, son of the prime minister of Qatar and chairman of the Qatar Islamic Bank, joined the board in April.

Credit Suisse may reach a Basel III common equity capital ratio of 11.5 percent by January of 2013 if its earnings and dividend payments are in line with analysts’ expectations, Chief Financial Officer David Mathers said on a conference call today. That ratio may rise to 13 percent by the end of 2013, he said.

UBS Building Capital

UBS has said it won’t issue contingent convertible bonds until it “significantly” builds up capital. The bank may also consider creating other instruments to satisfy regulator’s requirements to have contingency plans for increasing capital in times of need that would not dilute shareholders further, CEO Oswald Gruebel, 67, said last week.

UBS’s core capital ratio under Basel III may rise to 13 percent in 2013, excluding planned actions to reduce risk-weighted assets and assuming earnings will be accumulated in line with analysts’ estimates, the bank said in September. The bank has said it won’t be paying dividends while it builds up reserves.

The Swiss regulatory proposals are currently under discussion and could be approved, at the earliest, during parliament’s three-week autumn session, which starts on Sept. 12, Swiss parliament spokesman Mark Stucki said by phone.

To contact the reporter on this story: Matthias Wabl in Zurich at mwabl@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net

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