Where do fixed income investors go from here?
After 18 months of difficult headlines Credit Suisse could ill afford more negative press, and we therefore welcomed its decision to refinance its 7.125% Additional Tier 1 (AT1) bond last week at its first call date.
To begin with, it shows Credit Suisse’s management continues to act in line with bondholder interests and secondly, it demonstrates the bank’s ability to raise a very healthy order book, even for its most subordinated debt, in difficult market conditions. The new deal was a $1.65bn perpetual non-call five (slightly larger than the $1.5bn called bond it replaces) which drew demand of over $3bn and came with a coupon of 9.75%. This was roughly 120bp more than where the existing deal would have reset if it had not been called, showing the issuer’s willingness to continue to make bondholder-friendly decisions.
As we discussed the deal on the desk, our overriding conclusion was how remarkable it was that Credit Suisse was having to issue AT1 debt at a coupon just shy of double digits. Whilst CS has certainly faced many negative headwinds recently, it must be remembered that it is still one of two champion names in the world’s premier banking nation. Fundamentally we believe Credit Suisse is still very solid; its most recent results showed a common equity Tier 1 (CET1) capital ratio of 13.8%, which is a healthy 380bp buffer over its required level (equivalent to over CHF 10bn). Credit Suisse is rated BBB+ at issuer level, and the new AT1 is rated BB.
This new bond’s yield is not a one-off either. Looking at other Credit Suisse AT1s, investors can now pick up four-year paper close to 11% in USD, with a solid reset of +483bp. Elsewhere across the AT1 sector yields north of 10% – even for investment grade rated bonds with durations under five years – are now becoming fairly common.
With interest rate rises helping profitability, clean balance sheets and capital buffers still at very elevated levels, the AT1 yields on offer today look very attractive for solid banking names.