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Credit Suisse Takes the Pain

The $1.3 billion distressed debt sale is a lesson for other banks in how to reduce losses.

Credit Suisse has started to reduce the pain of its old mistakes. The Swiss bank has agreed to sell a portfolio of distressed debt to an arm of private-equity firm TPG for $1.3 billion. That's a sign that not only is the bank moving ahead with Chief Executive Officer Tidjane Thiam's plan to reduce exposure to the asset class, it's doing so at a lower cost.

The portfolio being sold to TSSP, a credit and special situations business, includes 270 instruments related to about 170 companies globally, Credit Suisse and TSSP said in a statement Tuesday. The sale will result in a $100 million loss, to be reflected in first-quarter results due May 10.

Ouch!

Credit Suisse stock plunged after it warned of of a first-quarter loss partly because of distressed debt

Source: Bloomberg

Compare that with what the bank achieved in in its last round of de-risking. In Thiam's words, on a March 23 call with analysts:

``We reduced our distressed credit exposure by 28 percent going from $2.9 billion at the end of 4Q 2015 to about $2.1 billion and decreasing. And we have been able to de-risk our teams at the cost which we consider acceptable with $99 million of write-downs in 1Q 2016.''

Recapping: In the first quarter it cost Credit Suisse $99 million to sell $800 million of illiquid distressed debt. In other words, roughly 12 percent of the book value of those assets went into the shredder. This time, unloading $1.3 billion cost $100 million, less than 8 percent. That still hurts, but it's less painful.

Make It Quick

Credit Suisse increased impairments almost fourfold last year and is still going

Source: Company filings

Preparing for Surgery

Credit Suisse increased its provisions for bad loans by 74 percent last year

Source: Company filings

For TSSP, it's probably not a bad deal either. The firm has $19 billion of assets. At that size, it's not easy to find enough stuff to buy, let alone at favorable prices. The money manager says on its website that it has ``a long-term, patient, and highly flexible capital base." If only Credit Suisse could say the same.

Assuming this sale was the sole change in the distressed portfolio since Thiam's March update, Credit Suisse still has about $830 million more to go. As the amount gets smaller, it should get easier to shrink it further while minimizing losses.

The transaction should be a good lesson to other banks that are stubbornly sitting on distressed debt. Standard Chartered, for one, has been toying with the idea of unloading $4.4 billion of bad loans in Asia but seems to blush and shy every time it's presented with the prospect of a sales contract.

The London-based lender should take a cue from Credit Suisse. Sometimes, a deep and fast cut hurts less.

(Replaces assets under management in sixth paragraph with company's updated figure.)
    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 clangner@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net

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