The move is a welcome boost to the potential $1 trillion market. Regulators have pinned their hopes on it as a way of building up badly-needed bank capital and protecting taxpayers.
Credit Suisse is selling the contingent convertible bonds to Qatar Holding and Olayan Group, two large Middle Eastern shareholders that backed it in the thick of the financial crisis.
The Swiss bank’s Chief Executive Brady Dougan said the transaction “supports our conviction that contingent capital can be a material source of capital for the banking industry.”
The bonds are designed to give the bank an extra shield if its capital is eroded. They replace existing hybrid debt. The deal is seen as positive as positive for the market as CoCos are largely untested and institutional investors have so far given them a cool reception.
“It has been a bit fast forwarded,” said Philippe Bodereau, head of European credit research at Pimco, the world’s biggest bond fund. “We are fairly open to these instruments after being satisfied with the structure and pricing.
It would take a nasty shock to the bank or the markets to trigger the conversion. Credit Suisse’s CoCos only convert into shares if the bank’s common equity Tier 1 ratio falls below 7 percent. This ratio stood at 12.7 percent at the end of 2010.
Switzerland has encouraged its two biggest banks UBS and Credit Suisse to issue the bonds to meet tougher capital rules aimed at strengthening them post-credit crisis.
And Credit Suisse said it was looking at offering more of the “buffer capital notes.”
This could happen as early as this week as the bank is meeting investors in Europe, Hong Kong and Singapore to discuss the issuance of more, people familiar with the matter said.
“The coupons are attractive but there are quite big risks as well, and many moving parts to capital ratio triggers,” Pimco’s Bodereau added.
Analysts estimate the CoCo market could swell to more than $1 trillion, but that depends on finding buyers — such as wealthy individuals through private banks, hedge funds or mainstream debt investors.
“CS has been amongst the most bullish proponents of the CoCo market and the fact it has successfully completed the largest transaction of any bank to date should give encouragement that there is appetite for these securities amongst investors,” said Evolution Securities analyst Piers Brown.
Credit Suisse’s shares fell 7 percent on Thursday and Friday after the bank cut its profitability target and dividend after it missing fourth-quarter profit forecasts.
Britain’s Lloyd’s Banking Group and Dutch lender Rabobank have previously issued types of CoCos. But other banks have been unenthusiastic, with UBS Chief Executive Oswald Gruebel proposing bonds that lose half their value if the bank’s capital falls below a set level as an alternative.
“CoCos dilute the share capital. We do not want that,” Gruebel said in a newspaper.
“The pressure is clearly on UBS to do something now,” said Helvea analyst Peter Thorne.
Britain’s Barclays PLC had considered paying staff in CoCos, but will instead this week opt for an instrument that will not pay out if capital falls.
Qatar and privately owned Saudi Arabian conglomerate Olayan invested in Credit Suisse in October 2008 and each also owns just over 6 percent of its shares, so a conversion of the CoCos would lift each holding to more than 10 percent.
“As conversion is remote and highly unlikely, it’s not dilutive to an earnings per share calculation,” CS Chief Financial Officer David Mathers said.
The CoCos will pay 9-9.5 percent annual interest and be issued in exchange for cash or hybrid capital. The exchange will not occur before October 2013.
