Credit Suisse Group AG, selling riskier assets to free up capital, has found a ready buyer: its own employees.
The same senior bankers who received part of their 2008 pay in illiquid loans and bonds contributed $450 million of their own money to buy more of the firm’s risky assets, such as mortgage-backed securities, said two people with knowledge of the plan, who asked for anonymity because the deal is private. The bankers, some of whom have left since 2008, had been willing to put almost $500 million into the Expanded Partner Asset Facility, or EPAF, which closed Dec. 31, one of the people said.
Banks are trying to divest illiquid loans and fixed-income securities because regulators would require the firms to hold more equity capital as a buffer against losses. Europe’s lenders have pledged to cut more than 950 billion euros ($1.2 trillion) of assets over the next two years to reduce the capital they would have to raise.
“This is an advantage to the company, if priced correctly, in that it will reduce their capital charges and liquefy their balance sheet,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “The question is what goes into it, how is it being valued and are they using a third-party firm to value it? Because to do anything else is a transfer of value from the shareholders to the employees.”
The new fund will be able to buy more than $450 million of assets because it will use leverage, or borrowed money, one of the people said. Credit Suisse may act as the lender to the employee fund, one person said. The reduction in so-called risk-weighted assets will cut Credit Suisse’s capital requirements, the person said.
Credit Suisse didn’t use a third party to value the assets, which were transferred at market prices in accordance with the bank’s compliance controls, said a person familiar with the matter. Victoria Harmon, a spokeswoman for Credit Suisse in New York, declined to comment.
“If the price at which you’re transferring the assets is based on market pricing, then you could just as easily take it to the market and do the same thing,” said Douglas Elliott, a former investment banker and now an economic studies fellow at the Brookings Institution in Washington. “If it’s not based on market pricing, then you have the risk you’re selling it too low.”
The Zurich-based bank gave about 2,000 managing directors and directors, the most senior ranks of employees, stakes in a $5 billion pool of illiquid assets as part of their 2008 compensation, the people said. While the value of fund had surged as much as 60 percent by mid-2010, more recent performance data hasn’t been disclosed.
Employees receive semi-annual coupon payments equivalent to the London Interbank Offered Rate plus 2.50 percentage points on their investment in the fund. The ultimate value of the original fund will be determined by 2016 as loans and securities mature or default, people familiar with the matter said in 2008.
The assets in the original Partner Asset Facility, known as PAF, included loans to companies with low credit ratings and bonds backed by commercial mortgages. Jonathan McHardy, whose positions at Credit Suisse have included supervising commodities trading and structured products, is responsible for managing the original PAF and the expanded PAF within the asset-management division.
Some of the assets that have been moved into the EPAF were previously overseen by Albert Sohn, who ran securitized products before moving into asset management this year to oversee a new hedge fund, one of the people said. Sohn will advise McHardy, the person said.
The bank’s shares advanced 3.4 percent today to 21.70 Swiss francs at 2:23 p.m. in Zurich. The stock tumbled 41 percent last year after a 26 percent slide in 2010.
Credit Suisse, led since 2007 by Brady Dougan, 52, said in November its securities unit had its first quarterly loss since 2008. The unit’s loss was a factor when Moody’s Investors Service warned on Nov. 14 that it might cut the group’s long-term credit rating of Aa2, two levels below the top grade of Aaa.
The company has announced plans to cut annual costs by 2 billion francs by the end of 2013, scale down its investment-banking division and cut 3,500 jobs.