Credit Suisse's $90 Billion Bitter Pill

Selling illiquid assets to reduce leverage could have a major impact on markets.

One question was left unanswered after Credit Suisse's analyst call on Wednesday: How is the bank going to reduce leverage in its global markets unit to $290 billion from $380 billion by the end of 2016? That's $90 billion of assets that may be unloaded at fire-sale prices. If these positions are illiquid, which some of them seem to be, it could have a major impact on several markets.

Time to Unload

A leveraged loan index hit the lowest in three years on Feb. 11, the same day Credit Suisse's stock touched the least since 1989

Sources: Bloomberg; Markit iBoxx indexes

To put some context around how aggressive the deleveraging is, consider the fact that Credit Suisse said in its third-quarter report in October it planned to reduce that number to $370 billion by the end of 2018. Chief Executive Officer Tidjane Thiam is speeding things up, considerably.

Where exactly all that money is located, outside of it sitting within Credit Suisse's global markets division, is unclear. That's the unit within investment banking responsible for capital markets transactions, such as initial public offerings and bond issues, and structured products. The bank describes it on its website as ``an innovative team focused on delivering creative financial solutions to our clients.'' Which could mean it deals in anything from asset-backed securities to leveraged loans.

The unit does have $2.1 billion of distressed-credit assets, hardly a large amount considering there's some $501 billion of similar bonds outstanding globally, according to data compiled by Bloomberg. Still, even that relatively small amount, if dumped onto an illiquid market, would have a huge impact, as Gadfly's Lisa Abramowicz pointed out.

Distress Driven

A distressed credit index touched a level not seen since 2009 in February as oil traded at $30/barrel

Sources: Bloomberg; Bank of America Merrill Lynch indexes

Just taking that slice of the $90 billion in isolation shows the scale of impairments Credit Suisse may face. Since Dec. 31, the Zurich-based financial institution managed to unload $800 million of its original $2.9 billion in distressed-credit assets, which led to writedowns of $99 million. Applying the same rate to the remaining position means Credit Suisse would be looking at another $260 million in losses. Moreover, those companies depending on the lender's balance sheet for survival could be toppled into bankruptcy.

Apart from distressed-credit assets, Credit Suisse also said it's exiting its European securitized product trading and long-term illiquid funding. The former is also an illiquid market that's notoriously tough to shift investments around.

As any trader knows, when a big player like Credit Suisse exits, it's a shock for everyone involved. That's even more true when the market is highly illiquid. Thiam's resolve to restructure the bank much faster than originally planned could end up electrocuting bystanders.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Christopher Langner in Singapore at

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    Katrina Nicholas at

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