* Credit Suisse old style Tier 1 bonds sink on call risks
* Banks could follow corporate lead and break market taboo
* Issuers weigh up cost benefit of old style bonds
By Aimee Donnellan
LONDON, Feb 6 (IFR) - A second warning shot fired by Credit
Suisse on Thursday that it might retire a hybrid Tier 1 bond
early sent the price of the issue tumbling and left the market
on edge about whether other banks will go down the same path.
The Swiss bank's 7.875% USD1.5bn Tier 1 bond dropped 3.5
points on expectations it will take advantage of a clause
allowing it to call the transaction early due to the loss of
regulatory or rating agency benefit.
As those calls tend to be at par or 101 - well below where
the bonds are generally trading - investors stand to lose money,
and analysts have already singled out Deutsche Bank and Lloyds
as potentially doing something similar.
Although some investors are up in arms, bankers said they
should not have been surprised by Credit Suisse's tough talk on
an earnings call Thursday, especially as the bank had already
flagged the potential move around a year ago.
"A regulatory call for partial loss of treatment is pretty
clear in the Credit Suisse terms and investors happily bought
into it at the time," said Daniel Bell, head of EMEA DCM capital
products at Bank of America Merrill Lynch.
"It is about allocation of the risk of regulatory changes."
He predicted a backlash from investors if Credit Suisse does
decide to exercise the call.
"We may start to see investors looking to shift the risk
back to the issuer by asking for a premium call price on bonds
that carry regulatory call options, particularly for partial
loss of treatment."
So far, banks have been loathe to exercise their right to
call from fear of raising the wrath of investors. Indeed,
issuers such as Danske and Societe Generale have opted for safer
liability management exercises instead to meet investors half
Both offered slight premiums over where their bonds were
trading to retire Tier 2 issues that had lost almost all of
their equity content with S&P - even though they could have
called them at par.
But analysts at CreditSights have already warned that banks
might not be quite as lenient going forward. They reckon there
is a higher probability of bond calls in 2014 than in previous
years as bonds with coupon step-ups will drop out of regulatory
capital at the first call date.
The idea of an early call has certainly caused some anxiety
in the investor community - where hopes were that banks would
stick to a friendly approach - and some are now reassessing the
"In general investors are very concerned about banks calling
bonds early for regulatory reasons," said Dierk Brandenburg, a
senior bank credit analyst at Fidelity.
"If Credit Suisse were to go for an early call option as
opposed to a liability management approach, it would be deemed
very aggressive by the market and there is a fear that other
banks would follow suit."
Some question why banks would choose to keep the peace with
investors when corporates such as Telecom Italia and
ArcelorMittal have already called hybrid issues well below where
they were trading, and without any sweeteners. [ID: nL5N0KV1IM]
Deutsche Bank is seen as an obvious candidate to call,
although analysts say that it will at least wait until Germany
has an agreed Additional Tier 1 structure.
Once that comes, Deutsche could threaten a regulatory par
call against an aggressive LME of their Tier 1s into new AT1,
according to Morgan Stanley analysts, who say the bank is
looking to raise EUR5bn in AT1 debt by 2015.
Others, though, say the situation isn't quite so clear cut,
and that Credit Suisse may not be so quick to call its old style
According to one liability management expert, certain
issuers are weighing up the cost of maintaining these
instruments as essentially Tier 2 debt rather than retiring
"A bank might still think it worthwhile to keep a bond
outstanding as a loss-absorbing or bail-inable instrument, or
even simply as cheap long-term funding," said CreditSights
Meanwhile, another analyst speculated it could have been a
clever manoeuvre by Credit Suisse to avoid paying over the odds
to buy the bonds back.
"They may have floated the idea of an early call out to the
market so the bond prices fall and they can launch a more
cost-effective liability management exercise," said Christy
Hajiloizou, a credit analyst at Barclays.
"The issuer is likely to be looking at a number of
scenarios, talking with investors to decide on the best course
of action, including the potential of an early call."