Traders Score Bonus Windfall in Shift to Risky Bonds From Cash

While many on Wall Street prefer their pay in cash, traders at Credit Suisse Group AG and UBS AG are doing pretty well this year after getting part of their bonuses in contingent-capital debt.

Such securities have gained 7.5 percent in 2014, more than returns on high-yield bonds or stocks, according to Bank of America Merrill Lynch index data. The debt, which can be wiped out or converted into equity if a bank fails to maintain enough capital, has been a bright spot in a world of little volatility and near record-low yields.

Credit Suisse joined UBS, Switzerland’s biggest bank, in paying staff partly in contingent capital, which the two lenders have to raise by 2019 anyway to satisfy regulatory requirements. The logic is that doing so would align the interests of employees and shareholders by giving incentives to limit risk.

While some traders bemoan the increasing proportion of compensation that’s being paid in non-cash securities, sometimes those forms of pay can be lucrative. These particular bonds, called CoCos, are thriving, at least so far in 2014.

Contingent-capital debt issued by Credit Suisse has returned 6.7 percent this year, while such notes from UBS have gained 6.6 percent, Bank of America Merrill Lynch index data show. That compares with 5.9 percent returns on high-yield bonds worldwide and 6.2 percent gains on the MSCI World Index of equities.

Beating Stocks

Drew Benson, a spokesman for Credit Suisse, declined to comment. Karina Byrne, a UBS spokeswoman, didn’t immediately provide comment.

Here’s why CoCos are outperforming: Banks have convinced investors they’ve become more credit-worthy after cutting their holdings of risky securities and eliminating thousands of jobs to lower costs.

Also, with average yields of 6.15 percent, the notes promise bigger returns than even junk-rated corporate bonds, which are now yielding 5.67 percent, according to the Bank of America Merrill Lynch Contingent Capital Index.

All risky assets are being propped up in a sixth year of unprecedented stimulus from the Federal Reserve and are getting an extra boost from new measures from the European Central Bank.

The notes may be poised to keep outperforming.

“Regulators have a vested interest in developing investor confidence” in the debt to facilitate more issuance, UBS credit strategists led by Matthew Mish wrote in a June 25 report.

So perhaps this year’s bonuses at the biggest Swiss banks will be even sweeter than expected.