Credit Suisse CDS hit record high as stocks plummeted

The cost of buying insurance against Credit Suisse default rose to a record high on Monday as the Swiss bank failed to allay market concerns about the strength of its balance sheet.

Traders and investors rushed to sell Credit Suisse stocks and bonds while buying credit default swaps (CDS), derivatives that act like insurance contracts and pay out if a company defaults on its debt.

Credit Suisse’s five-year CDS is up more than 100 basis points on Monday, with some traders listing it as high as 350bps, according to the Financial Times. The bank’s shares fell to historic lows of under SFr3.60, down nearly 10 percent on market open, before erasing losses. By the afternoon, they had fallen 6 percent to 3.74 SFr.

Market moves were even more dramatic for the bank’s shorter-dated CDS, with one trading desk listing Credit Suisse’s one-year CDS 440 basis points higher than Friday’s 550 basis points.

Those moves mean that Credit Suisse’s CDS curve inverted on Monday, a phenomenon that occurs when investors rush to buy short-term default protection. While these levels are even higher than where the Swiss bank’s CDS was trading during the 2008 financial crisis, a change in contracts means the derivatives are now pointing to a riskier debt class that faces greater losses if the bank collapses.

Senior Credit Suisse executives spent the weekend calling the bank’s key clients, counterparties and investors to reassure them about the group’s liquidity and capital position.

The bank was reacting to a sharp rise in CDS spreads over the past week and rumors on social media about the bank’s financial resilience.

In a briefing note prepared for executives speaking to investors on Sunday, the bank wrote: “One issue of concern for many stakeholders, including media speculation, remains our capitalization and financial strength.

“Our position in this regard is clear. Credit Suisse has a strong capital and liquidity position and balance sheet. The development of the share price does not change that either.”

Several investors said the exaggerated market moves reflected chaotic trading rather than underlying fears about the bank’s solvency, with one credit hedge fund manager likening investors buying one-year CDS to people rushing to “buy lottery tickets.” Many likened the situation to the sharp sell-off in Deutsche Bank’s debt in 2016, when concerns that Deutsche Bank would have to miss some coupon payments on its principal bonds caused sharp moves in the CDS market.

The sell-off also impacted the prices of Credit Suisse Additional Tier 1 (AT1) bonds — the riskiest class of bank bonds that are hardest hit by losses in a crisis — many of which fell about 10 percentage points on Monday. The price of a $1.5 billion AT1 bond, which the Swiss bank can repay in 2027, fell 12 cents to 58 cents against the dollar, according to Tradeweb.

JPMorgan analyst Kian Abouhossein said on Monday that the group’s financial position at the end of the second quarter was “healthy,” with a CET1 ratio — an indicator of its financial strength — at 13.5 percent and a cash coverage ratio at 191 percent.

“Credit Suisse has indicated its near-term intention to operate at a CET1 ratio of 13-14 percent, putting the ratio well within that range at the end of the second quarter and the liquidity coverage ratio well above requirements,” he wrote.

Citigroup analyst Andrew Coombs added that the bank’s capital ratio is high compared to peers and at a 12.5 percent ratio would mean about SFr2.5 billion (US$2.5 billion) in excess capital, where he expected the target to move if the bank sells its securitized product business, as it has signaled.

For comparison: UBS’s CET1 ratio was 14.2 percent at the end of the second quarter, while Deutsche Bank’s was 13 percent.

Recently installed chief executive Ulrich Körner and chairman Axel Lehmann have promised to present the market with a plan to fundamentally overhaul the group and downsize the investment bank along with third-quarter results on October 27.

The plan is expected to include cost cuts of up to CHF 1.5 billion, which will likely include the loss of thousands of jobs.

Abouhossein said there was a possibility that an announcement on the bank’s capital position would be brought forward in response to the market sell-off.

Credit Suisse declined to comment.

https://www.ft.com/content/51480b88-9e08-477d-8a31-f973e4b337a1 Credit Suisse CDS hit record high as stocks plummeted

Adam Bradshaw

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