BY TYLER DURDEN -- THURSDAY, MAR 16, 2023 - 03:12 AM
Summary:
- Saudis fold - refuse to throw any more money at Credit Suisse
- Credit Suisse stock hits record low
- Credit Suisse 1Y CDS explodes as counterparty risk hedging soars
- Credit Suisse execs urged a "show of confidence" from the Swiss National Bank
- ECB quantifying exposures to Credit Suisse
- US Treasury monitoring situation, talking with other regulators
- Fed working with UST to quantify exposures
- One major govt is pressuring Swiss to intervene
- Systemic risk threat spreads globally
- Swiss authorities seeking to stabilize bank
- Swiss National Bank and Finma issue statement of support
- Credit Suisse said it’s planning to borrow from the Swiss National Bank up to CHF50 billion under a covered loan facility.
Update (21:00ET): And so, the "bailout" arrives just a few hours before the Europe open, Credit Suisse said it’s planning to borrow from the Swiss National Bank up to CHF50 billion ($54 billion) under a covered loan facility which is "fully collateralized by high quality assets". It wasn't immediately clear what high quality assets CS has left to pledge but in a time of BTFP, we are confident they found something.
The bank also announced offers by Credit Suisse International to repurchase certain OpCo senior debt securities for cash of up to about CHF3 billion, which will help the bank pick up a few pennies in bond discount, even as it faces tens of billions in deposit flight.
Here is the full press release:
Credit Suisse Group takes decisive action to pre-emptively strengthen liquidity and announces public tender offers for debt securities
Credit Suisse is taking decisive action to pre-emptively strengthen its liquidity by intending to exercise its option to borrow from the Swiss National Bank (SNB) up to CHF 50 billion under a Covered Loan Facility as well as a short-term liquidity facility, which are fully collateralized by high quality assets. Credit Suisse also announces offers by Credit Suisse International to repurchase certain OpCo senior debt securities for cash of up to approximately CHF 3 billion.
Credit Suisse announces its intention to access the SNB’s Covered Loan Facility as well as a short-term liquidity facility of up to approximately CHF 50 billion in aggregate. This additional liquidity would support Credit Suisse’s core businesses and clients as Credit Suisse takes the necessary steps to create a simpler and more focused bank built around client needs.
Credit Suisse also announces today that it is making a cash tender offer in relation to ten US dollar denominated senior debt securities for an aggregate consideration of up to USD 2.5 billion. Concurrently, Credit Suisse is also announcing a separate cash tender offer in relation to four Euro denominated senior debt securities for an aggregate consideration of up to EUR 500 million. Both offers are subject to various conditions as set out in the respective tender offer memoranda. The offers will expire on March 22, 2023, subject to the terms and conditions set out in the offer documents. The transactions are consistent with our proactive approach to managing our overall liability composition and optimizing interest expense and allow us to take advantage of current trading levels to repurchase debt at attractive prices.
CEO Ulrich Koerner said: “These measures demonstrate decisive action to strengthen Credit Suisse as we continue our strategic transformation to deliver value to our clients and other stakeholders. We thank the SNB and FINMA as we execute our strategic transformation. My team and I are resolved to move forward rapidly to deliver a simpler and more focused bank built around client needs.”
As a global systemically important bank, Credit Suisse, like its global peers, is subject to high standards for capital, funding, liquidity and leverage requirements. As of the end of 2022, Credit Suisse had a CET1 ratio of 14.1% and an average liquidity coverage ratio1 (LCR) of 144%, which has since improved to approximately 150% (as of March 14, 2023). The use of the Covered Loan Facility of CHF 39 billion will further strengthen the LCR with immediate effect. Credit Suisse is conservatively positioned against interest rate risks. The volume of duration fixed income securities is not material compared to the overall HQLA (high quality liquid assets) portfolio and, in addition, is fully hedged for moves in interest rates. Moreover, the loan book is highly collateralized at almost 90%, with more than 60% in Switzerland and an average provision for credit loss ratio of 8 bps across Wealth Management and the Swiss Bank.
While the one paragraph that matters is the first one up top, what we find interesting is its attempt to distance itself from SIVB and other regional US banks that have been crippled due to their duration exposure and asset/liability mismtach, to wit: "The volume of duration fixed income securities is not material compared to the overall HQLA (high quality liquid assets) portfolio and, in addition, is fully hedged for moves in interest rates." In other words,what brought SIVB down is not what will bring us down - i.e., a good old-fashioned bank run. What is funny, however, is that by being "hedged", CS admit it will get not benefit from yields now tumbling.
* * * So to summarize: Credit Suisse effectively just took out a priming DIP loan, pledging its last remaining assets with the SNB, to shore up some $54BN in emergency liquidity, probably how much the bank has seen in deposit outflows. It will be very interesting on what terms those assets were pledged.
Another way of saying it, is that this is a last-ditch liquidity infusion, and all it does is prevent forced asset liquidations (a la SVB). Meanwhile it does nothing to halt the depositor flight because once confidence is gone, it rarely returns.
The news sent Euro Stoxx 50 futures 2% higher, and pushed Emini S&P futures to session highs of 3946; 2Year yields moved up by about 20bps to 4.00% before fading the move.
That said don't hold your breath for some breathtaking surge: once the market sees though this rescue for what it is - yet another temporary stop gap measure - it will demand much more, especially after the ECB hikes rates tomorrow which this "band-aid bailout" will allow the Central Bank to do, in the process guaranteeing an even bigger bailout down the line.
* * * Update (1730 ET): The Swiss National Bank and the country’s regulator said Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks and that the SNB will provide the bank with liquidity if necessary, in a statement.
Full Statement:
The Swiss National Bank SNB and the Swiss Financial Market Supervisory Authority FINMA assert that the problems of certain banks in the USA do not pose a direct risk of contagion for the Swiss financial markets. The strict capital and liquidity requirements applicable to Swiss financial institutions ensure their stability. Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks. If necessary, the SNB will provide CS with liquidity.
The SNB and FINMA are pointing out in this joint statement that there are no indications of a direct risk of contagion for Swiss institutions due to the current turmoil in the US banking market.
Regulation in Switzerland requires all banks to maintain capital and liquidity buffers that meet or exceed the minimum requirements of the Basel standards. Furthermore, systemically important banks have to meet higher capital and liquidity requirements. This allows negative effects of major crises and shocks to be absorbed.
Credit Suisse’s stock exchange value and the value of its debt securities have been particularly affected by market reactions in recent days. FINMA is in very close contact with the bank and has access to all information relevant to supervisory law. Against this background, FINMA confirms that Credit Suisse meets the higher capital and liquidity requirements applicable to systemically important banks. In addition, the SNB will provide liquidity to the globally active bank if necessary. FINMA and the SNB are following developments very closely and are in close contact with the Federal Department of Finance to ensure financial stability.
Notably, Credit Suisse ADRs still trading in the US showed no exuberance on this statement....
* * * Update (1430ET): Rather unsurprisingly, given its SIFI nature and the external pressure already reported, Bloomberg reports that, according to people familiar with the matter, that Swiss authorities and Credit Suisse Group AG are discussing ways to stabilize the bank
The firm’s leaders and government officials have reportedly talked about options that range from a public statement of support to a potential liquidity backstop.
Also among ideas floated include a separation of the bank’s Swiss unit and a long-shot orchestrated tie-up with larger Swiss rival UBS.
A statement from Finma or the Swiss central bank could be coming soon.
Of course, US equities soared on the news - not having a clue what the statement will say...
* * * Update (1330ET): With European markets closed, the chaos continues in CS with Reuters reporting that according to a source familiar with the situation, Switzerland is facing pressure from at least one major government to intervene on Credit Suisse in the coming hours given the systemic nature of the bank
It doesn't take too much imagination to see Macron screaming down the phone as the biggest French banks crashed most today.
Additionally, The Fed is reportedly working with the US Treasury to review Credit Suisse exposures.
* * * Update (1130ET): Earlier in the day, while speaking at the Financial Sector Conference in Saudi Arabia, Credit Suisse Group AG Chairman Axel Lehmann said government assistance "isn't a topic" for the lender as the Swiss bank sought to shore up confidence among shareholders and clients.
This may come as a surprise to some, but the Chairman may have 'misplaced' the truth.
The Financial Times reports that, according to three people with knowledge of the talks, Credit Suisse has appealed to the Swiss National Bank for a public show of support.
Credit Suisse also asked for a similar response from Finma, the Swiss regulator.
“It is looking inevitable that the Swiss National Bank will have to intervene and provide a lifeline,” said Octavio Marenzi, analyst at Opimas.
“The [Swiss National Bank] and the Swiss government are fully aware that the failure of Credit Suisse or even any losses by deposit holders would destroy Switzerland’s reputation as a financial centre.”
This latest news comes on top of a report that the ECB has asked EU lenders to disclose their exposures to the Swiss lender, a person familiar with the matter told the Financial Times.
Finally, Bloomberg reports that the US Treasury says it's monitoring the Credit Suisse situation, and is in touch with global counterparts.
Officials at the Treasury Department are working closely with European regulators, said one of the people, who spoke on condition of anonymity.
That appears to have been the final straw as 1Y CS CDS is now trading 17% upfront as counterparty hedge flows soar (implied spread around 2700bps or around a 30% prob of default)...
* * * Update (1000ET): Worsening sentiment got even worserer after The Wall Street Journal reports, citing unidentified people familiar with the matter, ECB officials contacted lenders it supervises Wednesday to ask about financial exposures to Credit Suisse AG.
“If regulators do not handle the Credit Suisse situation well, this will send shockwaves through the whole sector,” said Joost Beaumont, head of bank research at Dutch lender ABN Amro.
“To make matter worse, both sides of the Atlantic have banking issues.”
* * * Update (0800ET): Aside from global derisking, anxiety over Credit Suisse has sparked a huge dovish response in Fed expectations with the odds of a 50bps hike tomorrow at The ECB tumbling...
The entire curve expectations for ECB action has collapsed with the market now pricing in only 75bps of hikes by year-end...
And even more notably, Fed hike expectations have plunged with next week only a coin-toss between 0 and 25bps, and Sept pricing in 60bps of cuts...
With the terminal rate falling and coming sooner - May and done...
Pricing in a total panic by The Fed - with expectations of over 100bps of rate-cuts by year-end...
* * * As we detailed earlier, Credit Suisse Group AG's shares reached their lowest point ever, dropping by as much as 10%. This is the eighth consecutive session of decline, which comes in the wake of restructuring issues, delays in submitting its annual report due to 'material weakness' flagged by the SEC last week, and a broader industry selloff following the collapse of Silicon Valley Bank. In addition to these challenges, the troubled Swiss bank now faces a new problem: its top shareholder has said they will not invest any further due to the sharp decline in valuations.
"The answer is absolutely not, for many reasons outside the simplest reason, which is regulatory and statutory," Saudi National Bank Chairman Ammar Al Khudairy told Bloomberg TV in an interview on Wednesday.
That was in response to a question about whether Credit Suisse would receive fresh injections if another liquidity crisis emerged.
Saudi National Bank, which is 37% owned by the kingdom's sovereign wealth fund, is Credit Suisse's largest shareholder as of late 2022 after acquiring a 9.9% stake. Al Khudairy said there are no plans at the moment to take the stake over the 10% threshold because of regulatory hurdles. In the last several months, since the bank's equity has been on a waterfall lower, the Saudis have lost more than 500 million francs on their position.
The news the Saudis are perhaps done supporting the troubled Swiss bank sent shares down as much as 25% to a new record low in Zurich.
Putting that new record low in context... down over 98% from the 2000 highs. The red area is post-Greensill debacle...
Bear in mind that CD remains a SIFI, prompting systemic risk fears and has led to the cost of insuring the bank's bonds against default in the near term to distressed levels.
"One-year credit default swaps for the embattled Swiss lender were indicated at 835.9 basis points on Tuesday's close of business, based on pricing source CMAQ. Other pricing sources point to a further rise on Wednesday, while a level of 1,000 would indicate serious concern," Bloomberg said.
Five-year credit default swaps have widened the most ever -- indicating the restructuring of the bank and the hope to bring it back to profitability might be unattainable at the moment as a banking crisis triggered by SVB sparks contagion.
Also today, Credit Suisse Chairman Axel Lehmann stated the bank isn't considering government aid and that it would be inaccurate to draw parallels between its current difficulties and the collapse of SVB.
"We have strong capital ratios, a strong balance sheet," Lehmann said.
"We already took the medicine," he said, referring to the restructuring program announced in late 2022.
Barclays told clients this morning that the outlook for European banks remains uncertain in the short term, citing "too-difficult-to-predict" risks and the restrictive pathway of monetary policy.
The anxiety over Credit is spreading globally, and is certainly not ring-fenced as the entire European banking sector (stock and credit) is cratering...
European banks are legging down on this news.
EU banking credit risk surging.
Yields on the Geman two-year slide.
And European short-term rates markets are pricing out a 50bps hike by The ECB next week...
Prompting derisking everywhere as flight-to-safety flows see the 10 Year yield in the US tumble to 3.53%.
US main equity futs also catch a leg lower.
And gold outshines everything as contagion risks surge.
It is possible that the regional banking crisis is not yet resolved and may even be spreading across the Atlantic.
