The list of natural disasters investors can bet on is long and includes typhoons in Japan to storms in North America. It may soon be possible to add Credit Suisse.
The Swiss bank has approached investors with a spin on the insurance industry's traditional catastrophe bond, which pays investors above-market yields for taking a chance that their money being wiped out by severe freak events.
Rather than earthquakes or hurricanes, Credit Suisse is looking to cover potential operational losses of between 3.5 billion Swiss francs ($3.6 billion) and 4.2 billion Swiss francs. That's the scale of destruction created by a cyber attack or rogue trader.
For Credit Suisse, it's a smart idea -- in theory. Regulators are introducing tougher rules that required banks to set aside more capital against operational risks -- and the bond could help meet those requirements, and free up capital for more growing parts of the business.
Shareholders have already taken much pain: Credit Suisse stock has slumped 42 percent in the past 12 months, and the shares now trade at a discount to book value. Why not transfer some of the risk of future losses from unpredictable events to creditors?
Bond investors may be eager too: cat bonds enjoyed a strong return over the past year, as the Swiss Re global catastrophe bond total return index shows.
Credit Suisse CEO Tidjane Thiam, himself a veteran of the insurance world, has realized that in a world of negative interest rates investors will accept far greater risks in return for what are, by historic standards, only meager returns.
The senior slice of the securities will have a coupon of about 4 percent -- on par with the average coupon of a U.S. investment-grade bond. That looks stingy: contingent capital securities have an average coupon-at-par of 5.2 percent, while figure for the U.S. high-yield bonds is about 6.7 percent, according to Bank of America Merrill Lynch data.
But investors thinking of buying should turn to the litany of operational risks set out in the annual report: human error, fraud, sabotage, internal and external data breaches, and more.
These are not unique events: Think JPMorgan's $6 billion loss from the "London Whale," UBS's $2.3 billion hit from trader Kweku Adoboli, Lloyds' 16 billion-pound bill for payment-protection insurance. Cybercrime alone already costs the global economy more than $400 billion, according to a 2014 McAfee report. Storm season is a long one in the financial world.
Buyers will also have to have confidence that Credit Suisse's management can reduce these risks. But if the CEO and other decision-makers can be kept in the dark about $1 billion of trades, that looks like a brave call.
If Credit Suisse can find demand for these bonds, other banks will surely follow. Investors just need to be comfortable that the storm that has seen the rack up billions of pounds in losses and fines has actually passed. After all, they're being asked to take a bet the bank won't have a major stumble in the next five years.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Lionel Laurent in London at email@example.com
To contact the editor responsible for this story:
Edward Evans at firstname.lastname@example.org