• Bank said to have sufficient interest to go ahead with sale
  • Risk bond will have call option for rule changes, sources say

Credit Suisse Group AG has started taking orders for a new kind of bond to offload risk from events like rogue trading and cybercrime after receiving initial interest from investors, three people with knowledge of the matter said.

The bank has approached bond investors, hedge funds and asset managers in recent months with an offer for an insurance-linked, five-year bond of up to 630 million Swiss francs ($648 million). The two-tranche instrument is similar to a catastrophe bond, which insurers use to limit exposure to disasters such as floods and earthquakes.

The securitized bond would cover losses of between 3.5 billion Swiss francs and 4.2 billion francs from operational failures, a broad category that includes unauthorized trading, computer system disruptions, fraudulent transactions and failures in regulatory compliance. One person said the range may be designed to free up the maximum amount of capital for Credit Suisse, which embarked on a costly overhaul last year just as Switzerland raised its capital requirements.

The bond sale will close May 6, before the bank reports first-quarter results, the people said, declining to be identified as the matter is private. A spokeswoman for Credit Suisse declined to confirm or deny the sale. 

A small number of investors have committed to the entire junior tranche of about 300 million francs, two people said. The riskier tranche may carry a coupon of 5.5 percent, while the senior slice coupon may pay 4 percent, they said. The European Central Bank’s plan to start buying corporate bonds is driving down yields throughout Europe, making riskier debt securities more attractive to investors.

Call Option

The security will have a call option in the event of a change in rules for risk-weighted assets, allowing the bank to redeem it prior to maturity, one person said. That may make it less attractive, as investors may worry about the bank calling the bond for less than it’s trading.

Credit Suisse’s plans have created a stir among investors, with some saying the bond may open up a new market. Contingent convertible bonds, or CoCos, the first bonds to suffer losses if a bank runs into trouble, were developed after the financial crisis to shift the burden of bank failure from taxpayers to investors.

Some investors have questioned whether operational risk is possible to evaluate and whether it can be distinguished from losses if a bank is under stress. Others have expressed concern that such a bond would track the bank’s stock, although such securities are designed not to mimic markets.

Capital Erosion

Credit Suisse is scaling back riskier investment bank activities to free up capital for developing its wealth management business in emerging markets, especially the Asia-Pacific region. Chief Executive Officer Tidjane Thiam tapped shareholders for 6 billion francs last year to fund the restructuring. Some of that capital has already been eroded by about $1 billion in unexpected writedowns on trading positions.

The bank has also received a nod from Switzerland’s financial regulator, Finma, two people said. HSBC said in a note to investors last week that regulators may have misgivings with alternative forms of risk mitigation. Finma declined to comment.

The security will be underpinned by a policy with Zurich Insurance Group AG worth 700 million francs, people familiar with the matter said earlier. The insurer would retain 10 percent of the risk, with the rest bundled and sold to investors via a Bermuda-based vehicle. Bermuda is a hub for alternative providers of reinsurance capital.

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