As the value of Credit Suisse stocks and bonds plunged last week, some investors saw the sell-off as an opportunity to buy, anticipating that regulators would step in and prevent Credit Suisse’s complete collapse. They were right.
Swiss regulators have approved a deal for the bank to be bought by local rival UBS, though hedge funds that swept in to buy those battered bonds of the famed Swiss bank are facing mixed results.
Among the funds that bet on the bailout deal were two that specialize in buying bonds from companies on the verge of bankruptcy, according to two people with direct knowledge of the funds’ operations: Redwood Capital Management, which was a bondholder for the bankrupt Chinese. Evergrande real estate business, and 140 Summer. Goldman Sachs, Jefferies, and Morgan Stanley were among the banks that facilitated investor-to-investor transactions.
Both 140 Summer and Redwood declined to comment. Goldman Sachs and Jefferies declined to comment. Morgan Stanley did not immediately respond to a request for comment.
Trading in Credit Suisse bonds rose sharply late last week as tensions in the banking sector mounted, according to official trade data.
There were two types of trades that investors took: one that is set to make money, the other that is set to lose money.
The first is in Credit Suisse’s ordinary bonds: debt that the bank has borrowed at a fixed interest rate to be repaid over a specified period of time. These bonds traded around 60 cents on the dollar at the end of last week, meaning anyone who sold lost 40 percent of their original value. Traders said some bonds had already risen sharply on Sunday following the deal, now that the immediate threat of Credit Suisse’s defaulting on its debts had passed.
Because of the risks involved, the banks quoted bid and ask prices unusually far apart, protecting them from wild price swings. This also caused the banks to make more profit between the price they paid for the bonds and the price they sold them for.
The second deal that investors jumped into was Credit Suisse’s so-called AT1 bonds for roughly $17 billion. This is a special type of debt issued by banks that can be converted into equity capital should they run into trouble. This made debt inherently riskier to hold, because it carried the possibility that bondholders would be wiped out. Buying the bonds for as little as 20 cents on the dollar was viewed by investors as a kind of lottery ticket: a long shot, but a big payoff if it had worked.
Credit Suisse came under severe pressure last week as turmoil over the failure of California-based Silicon Valley Bank spread across the Atlantic.
On Sunday, the Swiss Financial Market Supervisory Authority, or Finma, approved a deal for UBS to take over its smaller rival. “The transaction and the measures taken will guarantee the stability of the clients of the bank and the financial center,” he said. a statement from Finma.
It said the AT1 bonds would be removed as part of the deal, to add roughly $16bn of capital to support the UBS acquisition.
That surprised some investors because it upset the normal order in which holders of a company’s different assets expect to be paid in the event of bankruptcy. Stock investors are at the bottom of that pay list and typically lose all of their money before other investors.
However, in this case, the regulators chose to trigger the conversion of the AT1 bonds to equity to help the bank, while also offering Credit Suisse shareholders one UBS share for every 22.48 Credit Suisse shares. that they owned
“This acquisition is attractive to UBS shareholders, but let’s be clear, as far as Credit Suisse is concerned, this is an emergency bailout.” said Colm Kelleher, chairman of UBS. “We have structured a transaction that will preserve any remaining value in the business while limiting our downside exposure.”
