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Credit Suisse deal marks breakthrough for contingent convertibles

Strong demand from conventional investors promises bright future for new-style bank capital; regulatory support, hunger for yield, a simple structure, and clever timing are keys to success.

No sooner had bond market participants learned of Credit Suisse’s successful completion of a buffer capital notes deal widely marketed to investors outside the US than expectations grew that more offerings would follow quickly in the weeks ahead. Suddenly estimates for the eventual supply in a new and unproven bank capital market that has stuttered along with a handful of outstandings for the past 15 months start at $500 billion and go up from there. The $2 billion Credit Suisse transaction generated demand of $22 billion, with orders coming in from 500 separate accounts ranging from private banks to hedge funds, specialist convertible funds and conventional fixed-income investors. These buyers were all clamouring to take the chance that the bank would not, through the 30-year life of the five-year call host bonds, see its Basle 3 common tier 1 equity ratio fall below 7%, thus triggering conversion of the notes into common equity at what would no doubt be a low point for bank share prices.

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