yuelan
By Breakingviews
Credit Suisse’s (CS) underwriters are still several stops short of panic stations. A 20-strong consortium led by Deutsche Bank (DB), Morgan Stanley (MS), Royal Bank of Canada (RY) and Société Générale (OTCPK:SCGLF) could end up holding a chunk of the stricken lender’s stock if its 2.2 billion Swiss franc ($2.4 billion) rights issue fails. Yet, they have a margin of safety, while Chair Axel Lehmann probably has a few fallback options up his sleeve.
Shares in the Zurich-based lender have fallen 40% since October 26, the day before it unveiled a new strategy including plans to raise fresh equity. A selloff is normal ahead of a rights issue, since existing investors must either cough up or own a smaller percentage of the company. But Credit Suisse’s shares are getting nail-bitingly close to the 2.52 Swiss franc offer price. On Thursday afternoon, they were just 7% above that key threshold.
The risk for the banks is that a sliding share price and the soaring cost of insuring Credit Suisse debt spooks clients and counterparties, creating a downward spiral. Customers pulled about 80 billion Swiss francs of assets, mostly from its wealth management unit, within a few weeks starting in October. Though the outflows slowed, the shares have still taken a battering. If they end up comfortably below 2.52 Swiss francs on December 8, the rights would expire worthless and some investors may not take up their share, leaving underwriters stuck. That’s rare for a large bank: perhaps the most prominent example was Britain’s HBOS in 2008.
Deutsche, Morgan Stanley and the others, however, have more than a few crumbs of comfort. First, Lehmann may yet calm market nerves: on Thursday, he said that outflows had partially reversed. Second, Credit Suisse’s equity is now trading at just one-quarter of tangible book value, after adjusting for the capital raise and its guidance for fourth-quarter losses. It’s arguably cheap enough that the underwriters could persuade other deep-pocketed investors to put up some money. Saudi National Bank, for example, recently backed a separate private share placement.
And even if the banks end up holding some of the bag, it’s not obvious that they’ll sustain huge losses. The group’s relatively stable Swiss retail business alone is worth 14 billion Swiss francs, according to JPMorgan analysts, which is more than the parent’s current market capitalisation. That means even if Credit Suisse’s problems endure, its parts could probably be broken up and sold off at a price that would make the banks whole. The underwriters can’t exactly rest easy, but they needn’t break too big a sweat.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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