Contingent convertibles: Credit Suisse deal marks breakthrough
Strong demand from conventional investors; regulatory support, hunger for yield, a simple structure and clever timing.
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 III common equity tier 1 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.
So, after a number of false starts since the debt exchange by Lloyds Banking Group at the end of 2009 that marked the emergence of such instruments, it seems that the takeoff point has finally been passed for contingent capital.