Credit Suisse’s ‘Rogue Trader’ Bond Falls Short on Risk

Credit Suisse Group AG sold 220 million Swiss francs ($222 million) of bonds designed to offload potential losses on events like rogue trading, with some investors sidestepping the issue because of the incalculable risk.

The second-largest Swiss lender initially planned to sell as much as 630 million francs of the notes, three people familiar with the deal said when it was first marketed. Order taking was extended earlier this month, people with knowledge of the deal said, and insurance blog Artemis reported on May 17 the offer was being cut to about 200 million francs.

“We did look at the risk bond for some time and considered investing -- it’s definitely an interesting idea ” said Dirk Schmelzer, a money manager at Plenum Investments AG, an investment firm specializing in insurance-linked securities. “It would have been difficult to explain to our clients why we’d invest in such an instrument as the risks are hard to assess and difficult to remodel.”

An official at Credit Suisse in London declined to comment on the bond sale. The average deal size for new insurance-linked securities is about $260 million, according to data compiled by Swiss Re AG. Almost $7 billion of the notes were issued last year, the insurer said in a January report.

The five-year securities are similar to catastrophe bonds, which insurers use to limit exposure to disasters such as floods and earthquakes. The Credit Suisse notes 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, people familiar with the matter said previously.

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The security is underpinned by a policy with Zurich Insurance Group AG and the insurer retains 50 million francs of the risk, with the rest bundled and sold to investors via a Bermuda-based vehicle, according to a person familiar with the matter, who isn’t authorized to speak about it and asked not to be identified. Bermuda is a hub for alternative providers of reinsurance capital.

“I am not surprised that they couldn’t raise the originally planned amount,” said Dirk Lohmann, chief executive officer of Secquaero Advisors AG. “The major risks within the bond have a high probability to be correlated with Credit Suisse’s stock.”

Triggering the instruments could have systemic effects on the banking system, HSBC Holdings Plc analysts led by Alevizos Alevizakos said in a note to clients last month. “It is difficult to separate ‘ordinary’ losses from those from internal control or business processes failures, making the trigger conditions less transparent,” the analysts wrote.

Credit Suisse is seeking to reduce risk and free up capital to develop its wealth management business in emerging markets under a strategy outlined in October by Chief Executive Officer Tidjane Thiam. The bank attracted net new assets of 17.8 billion Swiss francs in the Asia-Pacific region last year and the bank wants to boost that figure to 25 billion francs annually by 2018.

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