Switzerland’s second largest bank had to react quickly with an innovative convertible offering after the country’s central bank demanded an increase in its capital base.

The Swiss National Bank (SNB) is not known for pulling its punches. And its 2012 financial stability report on the country's banks was no exception. Singling out Switzerland’s second largest bank, the SNB said bluntly: “For Credit Suisse, given the low starting point and the risks in the environment, it is essential that it already substantially expand its loss-absorbing capital base during the current year.”

That was on June 14.  Just one month later, Credit Suisse announced a SFr8.7bn ($8.9bn) immediate capital boost, including a SFr3.8bn issue of mandatory and contingent convertible securities (Maccs). These securities carry a 4% coupon but will be converted in March 2013 into Credit Suisse equity at a fixed conversion price of SFr16.29 a share, a discount of 5% to the stock price on July 18.

The move was a deft response to damaging speculation about how the bank might seek to boost its capital ratios, speculation that was driving down the share price and prompting question marks about the leadership of chief executive Brady Dougan.

Bearing in mind the size of the capital raising, Credit Suisse had to structure the transaction with some care. If the bank had raised straight equity, it would have had to seek shareholder permission and that would have delayed the process. But time was of the essence. Confidence had already been damaged by the SNB’s comments and the bank was keen to avoid a prolonged period of uncertainty. Fortunately, Mr Dougan already had authorisation from shareholders to raise conditional and convertible capital and this dictated the size of the Maccs issue.

“The Maccs structure allowed us to raise core equity Tier 1 capital as part of our capital plan without being exposed to market risk for an extended period of time and with the pricing of the capital raising at market rather than at a discount. The Maccs issue and overall capital plan was welcomed by the market, evidenced by the share price increase of 4.5% on the day of the announcement,” says Frank Heitmann, head of Europe, Middle East and Africa convertible origination at Credit Suisse.

Sovereign investors

The overall capital-raising plan was devised following close discussions with the SNB and in-depth talks took place, too, with strategic investors, both sovereign wealth funds and financial institutions. This was a key element of the risk-averse nature of the Maccs deal: Credit Suisse was determined to ensure the Maccs were fully underwritten so it approached investors in advance of launch. Among existing investors, Qatar Holding, the Olayan Group of Saudi Arabia and the Norwegian sovereign fund Norges Bank Investment Management participated in the transaction. Credit Suisse also managed to lure in new investors, such as Singapore's state investment agency, Temasek.

Qatar Holding and Olayan have played a central role in the Credit Suisse drama and early last year swapped Tier 1 capital notes issued in 2008 for SFr6bn of contingent convertible bonds (CoCos). Maccs are clearly different from CoCos, however, because they will definitely convert into shares next year, whereas CoCos would only convert under certain, distressed situations. In many regards, this made Maccs an easier concept for investors to grasp.

The transaction was divided into two equal tranches. Investors underwrote the entire deal but securities from tranche B, valued at SFr1.9bn, were then offered more widely to shareholders during a short subscription period from July 20 to July 27. The response was enthusiastic as shareholders swooped on SFr1.8bn of Maccs, or 96.6% of securities on offer. The take-up was particularly encouraging for Credit Suisse, when compared with shareholder response to rights issues for other companies in recent years.

Shareholder support

According to research from the bank’s capital markets desk, convertibles have tended to attract a rights take-up of little more than 13% on average over the past 10 years. Even the average subscription to traditional at-market equity capital raisings over the past three years has been just 71.9%. Response to the Credit Suisse Maccs is apparently more typical of discounted rights issues, therefore, where the take-up averages more than 95% – even though the Maccs were priced at a discount of just 5%.

“We were very pleased by the 96.6% take-up of tranche B. The remaining sum of SFr64m, for which rights were not taken up, were sold to strategic and institutional investors as per the definitive agreement on July 18,” says Mr Heitmann.

The speed of the transaction worked to Credit Suisse’s advantage, too. Traditionally, shareholders are given several weeks to decide whether to subscribe for new shares. But Credit Suisse was able to hasten the process because the Maccs had been underwritten directly by investors, rather than banks.

“The support we received was very high and we felt it was a significant vote of confidence in the bank from both new and existing investors,” says Mr Heitmann.


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