Credit Suisse Offers $3 Billion Debt Buyback to Calm Nerves

A step made by Credit Suisse Group AG with the intention of easing investor worries ahead of the disclosure of a significant strategy revamp was to make an offer to buy back up to $3 billion of the company’s own debt.

The move is a message of confidence since it demonstrates that the bank has sufficient liquidity to capitalise on the current downturn in debt markets and purchase its own notes at a discount. During the trading day on Friday, both Credit Suisse shares and bonds appreciated, while the price of default insurance went down.

The turbulent week for the bank situated in Zurich was caused by the markets’ questioning of the bank’s stability in the midst of a wider sell-off. After more than a year of losses and management blunders, the Chief Executive Officer of the bank, Ulrich Koerner, is scheduled to detail the bank’s second strategy overhaul in a year at the end of this month. This is widely seen as an important opportunity to restore faith in the lender after such a long period of time.

According to Filippo Maria Alloatti, head of financials credit at Federated Hermes Ltd. in London, the debt repurchase plan is “a prudent move; it promotes trust in the liquidity of the balance sheet and helps cut Credit Suisse’s funding costs.”

The debt buyback is similar to an offer made by Deutsche Bank AG in 2016 for $5.4 billion when the markets were beating up on the German lender; however, the effect of this offer to soothe the markets was only temporary.

The offer is comprised of debt securities denominated in euros and pound sterling worth up to one billion euros ($980 million), in addition to a second offer for securities denominated in US dollars worth up to two billion dollars. At 12:30 p.m. local time in Zurich, the price of a share of Credit Suisse was 4.50 Swiss francs, reflecting a gain of 6.9%. According to ICE Data Services, the cost of insuring against default on five-year senior debt has decreased to 322 basis points, after having risen to levels that had never been seen before earlier in this month.

The financial institution is interested in purchasing the bonds at significantly reduced pricing. For instance, Credit Suisse will pay less than 96 cents on the euro to buy a 750-million-euro floating-rate note that was indicated above face value on Friday. In addition, Credit Suisse will offer a spread of 350 basis points over German government bonds for a 1.5-billion-euro issue that will trade well below 300 basis points in September. Both of these deals will take place in October.

During the summer, the financial institution was required to pay an almost double-digit coupon in a transaction denominated in dollars because it had obtained capital through the purchase of so-called Additional Tier 1 notes, which are the riskiest sort of bank debt. The current market price for that note is more than 10 cents less than its face value.

According to a statement released by Credit Suisse, “the transactions are consistent with our proactive approach to managing our overall liability composition and optimising interest expense.” The statement also noted that “the transactions allow us to take advantage of market conditions to repurchase debt at attractive prices.”

In August, the Swiss bank decided to replace David Mathers with Dixit Joshi, a former executive at Deutsche Bank. Joshi was promoted to the position of chief financial officer. This makeover of Credit Suisse will most certainly involve the sale of assets or departures from markets across units, and it is anticipated that this would result in a considerable reduction in the size of the investment bank’s losses. On October 27, it is anticipated that the findings of the evaluation will be presented together with the financial results for the third quarter.

During a time period in which the investment bank has been experiencing significant losses, investors have been concerned about how the bank would fund the cost of its restructuring plan and what the implications of this will be for the bank’s overall capital strength. At the end of June, Credit Suisse had a CET1 capital ratio that was 13.5%, which was far higher than the minimum required by international regulations, which was 8%, and the requirement in Switzerland, which was 10%.

According to Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA, “The bond buyback is Credit Suisse’s way of muddling through the current situation as they hope to bring down its CDS spreads before they tap the bond market again to raise capital.” “The bond buyback is Credit Suisse’s way of muddling through the current situation.” “Credit Suisse may possibly have picked the correct time as the current market also happens to be one of the few windows for firms this year to raise bonds in the public market,” which is why the current market is so important.

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