Hedge Fund Says Credit Suisse Swaps Point to Junior Bond Losses

Credit Suisse Group AG’s subordinated bond holders will likely take losses so the lender can replenish its regulatory capital levels, according to a veteran hedge fund manager.

(Bloomberg) — Credit Suisse Group AG’s subordinated bond holders will likely take losses so the lender can replenish its regulatory capital levels, according to a veteran hedge fund manager. 

That assessment is based on prices of instruments, including derivatives to cover the bank’s potential default, said Jose Mosquera, chief investment officer at hedge funds Rho Investments and Quadriga Credit Opportunities and a former head of financial credit trading at HSBC Holdings Plc.

Early Wednesday, the bank’s additional tier 1 notes — which rank junior to all other ranks of debt — were indicated below 80% of face value, a level typically associated with distress. Also, quotes for one-year CDS were considerably more expensive than the offers for longer durations as lenders tried to give themselves a near-term shield from their exposure to the lender, according to people with knowledge of the matter.

“Short-term CDS in Credit Suisse is almost impossible to source and bids for senior bonds are very limited, whilst we are seeing extensive supply of subordinated bonds at distressed levels,” Mosquera said. It “leads me to think that the market is pricing a very high chance of a bank resolution involving full share burden by sub debt holders.”

Switzerland’s central bank and financial regulator late on Wednesday said the bank will receive a liquidity backstop if needed.

The embattled swiss lender’s $1.65 billion of 9.75% perpetual contingent capital notes — a type of junior securities — were quoted at 39.89 cents Wednesday, down from 73.15 cents on Tuesday, according to Trace.

Switzerland’s second-largest lender in recent years has been pummeled by blowups, scandals, leadership changes and legal issues. Its stock plummeted Wednesday after its biggest shareholder ruled out increasing its stake because of regulatory constraints.

A Zurich-based representative for Credit Suisse declined to comment. 

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