Credit Suisse Mulls Issuing Up to $30 Billion in 'Coco' Bonds

Credit Suisse’s chief executive said he hoped to begin issuing billions of dollars in contingent-capital bonds in the next year to help shore up the bank’s financial strength well ahead of new Swiss regulations.


Brady Dougan, top executive since 2007, also defended Credit Suisse’s decision to award one-off payments to about 400 senior employees whose bonuses had been slashed to avoid a 50 percent supertax on bonuses over £25,000 ($39,500) in the UK, arguing that the bank had to head off rivals’ attempts to poach staff.

While Credit Suisse has until 2019 to meet new contingent capital rules, Mr Dougan told the Financial Times that he would aim to issue so-called “coco” bonds soon to assure investors and regulators that there was adequate demand for the debt.

“I certainly hope that during the course of next year we can do something,” he said. “We’ve actually received a lot of reverse inquiries that said ‘If you’re going to issue these we’d be very interested in looking at them’.”

The bank may issue as much as $30 billion in cocos over several years to replace a portfolio of hybrid securities that will no longer qualify as capital under new Basel committee rules.

Credit Suisse’s bullish stance on cocos stands in stark contrast to that of arch-rival UBS , which has said it would not consider issuing the instruments in the near future.

The bonds convert into equity or other capital if a bank’s financial strength begins to crack. Although investors will demand higher interest rates than for more senior debt, the bonds’ tax-deductible status makes them cheaper than common equity. Switzerland is the only country so far to have publicly backed their use in its efforts to force systemically important banks to hold far greater cushions against losses.

Credit Suisse’s August bonus payments were roundly criticized by UK politiciansand some competitors as a ploy to avoid the tax, which expired in April. But Mr Dougan said the bank only moved forward with the additional compensation after rivals began to lure employees with promises that they would pay up front the portion of their 2009 bonus lost to the tax.

“We did feel we had to respond to the market conditions,” Mr Dougan said. “A few of our competitors ended up doing the same thing because I think you could see there was the market pressure on. I guess it probably doesn’t speak that well for the overall environment of our industry, but that’s basically what happened.”

This contention will no doubt fuel concerns that the City has yet to rein in banker pay. To Mr Dougan’s point, only Credit Suisse and Goldman Sachs had publicly disclosed they would reduce their incentives awarded to UK bankers in response to the 50 per cent “supertax” on all bonuses over £25,000.

“Obviously not many in the competition followed, and then what we found was that we were at a real disadvantage in terms of people luring away talent,” Mr Dougan said.