A conservative funding structure has helped the Swiss bank retain a strong capital base, while an integrated business model has given it more flexibility. This has enabled it to produce its largest-ever single debt issue. Writer Edward Russell-Walling.

if cream eventually rises to the top in the bond markets, then nothing accelerates the process as tellingly as a credit crisis, according to Credit Suisse CFO Renato Fassbind. That’s not exactly how he phrases it, but those are his sentiments. The bank has just attested to its top-o’-the-milk status by pulling off its largest-ever single debt issue – €3.65bn in five-year senior paper.

Credit Suisse struck within days of announcing its second-quarter results, which had been well received by the market. Only one of its five reporting entities (Swiss corporate and retail banking) reported higher profits than a year earlier. But the market was pleasantly surprised by the bank’s negligible writedowns, compared with SFr5.3bn ($4.8bn) in the first quarter, much of it related to a mispricing scandal. The shares closed 5% higher on the day.

“It has been a difficult time over the past 12 to 16 months,” says Mr Fassbind. “But our diversified global revenues have proved a sound base for us to outperform the market versus many of our peers. And our conservative funding structure has helped us maintain a strong capital base. At 10.2% for the end of Q2, our capital ratios are strong.”

Integrated model

The group has benefited from a more integrated business model, trying to build share of customer wallet from more than one business arm. In similar spirit, funding has been centralised. Until early last year, most of the group’s non-bank issuance was out of Credit Suisse (USA). Today, almost all long-term debt is issued by Credit Suisse bank, which has a higher rating (Aa1/AA-) than the group (Aa2/A+).

“This has given us more flexibility,” explains global treasurer Rolf Enderli. “Before, we mainly targeted the US market. By using the bank to issue, we can now use the funds anywhere we want, and can approach different markets – Europe, Asia, the US – wherever is most appropriate.”

In 2006, for example, as much as 90% of the group’s issuance was in US dollars. For 2008 to date, however, 62% of funding has been in euros, with about a third in dollars and 7% in the Swiss capital markets.

“As funding has become more diversified, issuance has clearly shifted to the euro, because that market is more liquid for long-term debt – though our term CDs [certificates of deposit] are still done in dollars,” says Mr Enderli. The treasury keeps an eye on other markets such as the yen, Canadian dollar, Australian dollar and even the Mexican peso, but these remain minor funding sources.

During the spring, the bank had gone to market with a two-year floating-rate note and a three-year fixed rate issue, and it planned a placement for Q3. In anticipation of a positive reaction to the second-quarter results, preparations were made to go with a substantial transaction within days of the announcement – at least €1bn, with a five-year maturity.

Priced for uncertainty

Just as the bank was set to launch, Merrill Lynch announced it would take a further $5.7bn writedown in the third quarter. “That added to the uncertainty,” says Mr Enderli. “So we priced the issue to take account of that and the size we wanted.” The pricing guidance, at 125 basis points (bps) over mid-swaps, was seen as generous, but it certainly achieved the desired result. Orders of more than €4bn came in, surprising even the bank, which priced $3.5bn in line with guidance and tapped another $150m at swaps plus 122bps a couple of days later.

Many banks could not have done it – or not at that price. Mr Fassbind notes the credit crunch is still very much with us and shows no immediate signs of easing: “I’d love to have a crystal ball, but it would be wrong to speculate that things will change soon.”

Nonetheless, the effects are not entirely negative. “There has been a flight to quality, a tiering of risk premiums, and the difference between certain banks is substantial,” he emphasises. “US banks, for example, now have substantially higher spreads.”

Increases in the cost of issuance have hit Credit Suisse less dramatically than many other banks, Mr Fassbind continues. “We still have the ability to come to market and issue in these volumes, in a way that an A-rated bank could not,” he concludes. “Our conservative funding philosophy means we have been a net short-term lender to the market during the crisis. We have been net cash long and we want to maintain that.”

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