Structured products agents sell $519 million in frantic week amid UBS takeover of Credit Suisse

By Emma Trincal

New York, March 22 – Structured products agents priced $519 million in 83 deals in the week ended March 17 following $1.2 billion in 270 offerings the week before, according to updated data compiled by Prospect News.

Stocks and ETFs regained some footing with 21% of the total; rates rose to 24% of notional sales in just one deal and equity indexes grabbed a 52% share.

Among the top deals: Citigroup Global Markets Holdings’ $66.41 million of six-year synthetic convertibles linked to Halliburton Co. and Royal Bank of Canada’s $121.84 million of two-year fixed-to-floating rate notes on the two-Year U.S. Dollar SOFR ICE swap rate.

No other big offering was spotted at press time during what turned out to be a very tumultuous week.

The main story last week for investors in general and the structured products market in particular was the acquisition of Credit Suisse by UBS over the weekend in a deal brokered by the Swiss National Bank.

Sunday merger

Credit Suisse had been in trouble for years, plagued by scandals, poor risk management and losses.

Investors of late were increasingly wary of the rapid widening of the issuer’s credit default swap spreads.

Many avoided its structured notes offerings despite tempting terms, according to interviews with advisers.

Credit Suisse’s problems intensified last week after its top shareholder said it would not provide any more backing coinciding with the bank’s disclosure in its annual report of some “weakness” in its internal controls.

The share price of Credit Suisse plunged on March 15 prompting the Swiss central bank to throw a $54 billion lifeline to Credit Suisse. Since the effort to save the embattled bank failed, the Swiss National Bank brokered an “emergency rescue” forcing the takeover of Credit Suisse by UBS on Sunday.

Up until last week, Credit Suisse was still issuing structured notes but at a very slow pace. What really preoccupied investors last week was the outstanding paper.

Preferred treatment

Some market participants pointed to the tier 1 bonds, or AT1s, also known as Contingent Convertible bonds, nicknamed “CoCos,” which the Swiss central bank decided would be written down as part of the deal. The concern was that the same bad luck would hit investors holding Credit Suisse’s structured notes.

“The $17 billion of CoCo bonds are being written off while shareholders were able to get something. Bondholders get wiped out but not the shareholders. That’s not how it’s supposed to work,” said Jerry Verseput, president of Veripax Wealth Management, who buys and trades structured notes for his clients.

“They justify it saying those CoCos bonds were created in 2008 for the purpose of being written down if a bank is in trouble. But you’re entitled to ask: since when do shareholders have priority claim? There are a lot of disagreements around that.”

Outstanding

Those concerns and criticisms were fueled by the lack of transparency around what’s coming next now that the merger is official since Sunday. Some traders complained they were not getting any information from either Credit Suisse or UBS.

“There’s still a lot of outstanding paper in the market. I’d love to know what’s going to happen with it,” one of them said.

“As of last week, they were still issuing. Whatever is coming out I’m sure has been canceled.

“We just want to know although I’m not really worried. It’s hard to imagine that what they’ve issued would go to zero. All we can hope for is a swift and clean resolution.”

No need to panic

Verseput himself was confident that structured notes wouldn’t go the way of the CoCos.

“If they did that with structured notes here, it would destroy the confidence in the banking system,” he said.

“They have to sort things out. It could take four to five years.”

At the root of those fears is the hybrid nature of those bonds.

“They have a similar profile to structured notes,” the trader said.

“Could the equity-linked exposure be wiped out? Would investors get their investment back at par? Investors don’t want to hear their notes are worth nothing. There are many legal issues popping up.”

But an asset manager saw no cause for alarm.

“AT1 bonds and structured notes are completely different. Structured notes are senior unsecured debt while AT1 have a lower priority of payment,” said Samuel Rosenberg, managing partner at Lutetia Capital.

It doesn’t help that U.S. investors are not familiar with these AT1 bonds, introduced in Europe during the financial crisis and considered highly risky.

“What happened was a shock. No one expected $17 billion of AT1 to be wiped out. It’s a significant loss. So, of course people got spooked,” he said.

The fears also arose from the perceived similarities between AT1 bonds and structured notes.

“They convert debt into equity at a certain strike, and that’s the similarity. But that’s all. With structured notes, it’s not the case. Even with reverse convertibles it’s different because it’s almost always paid in cash based on the value of the equity, and when it’s not, it’s at the discretion of the issuer,” said Rosenberg.

Regulator-blessed marriage

What is clear from the merger agreement is that from now on UBS will be assuming the outstanding debt.

It’s not going to be easy, sources said.

Since 2004, Credit Suisse AG, London Branch has issued $43 billion in 11,706 deals, or less than 5% of the entire notional, according to data compiled by Prospect News. No information was available on the outstanding debt amount.

In the past, Credit Suisse also issued notes out of its Credit Suisse AG, Nassau Branch for a $6.48 billion total during the period in 1,440 deals. Rounding up these numbers, the bank has brought to market approximately $50 billion in 13,146 offerings since Prospect News began collecting data in 2004.

The next more pressing question is how UBS will conduct the transition.

“You need a restructuring attorney or a distressed debt person to give you an idea. But if they’re on the case, they can’t talk. And chances are nobody knows even inside the banks. The stuff is being worked out as we speak,” said Steve Sosnick, Interactive Brokers’ chief strategist.

A UBS spokesperson declined to comment. A top executive at Credit Suisse’s derivatives desk did not return a call.

“They did it in a hurry on a weekend and under duress. There is no registration filing containing clarity.

“And this is not your typical merger. I would say it’s more like the financial equivalent of a shotgun wedding.

“The father of the bride tells the groom: ‘she’s in trouble, you need to marry her while holding a gun to his head,’” he said.

For this year, Credit Suisse’s issuance is estimated at 67 deals totaling $129.51 million, according to Prospect News.

In March, Credit Suisse only priced three equity-linked notes offerings between March 6 and March 14 for a total of $1.23 million. One, which came out on March 6, was an issue of $555,000 of 18-month contingent coupon autocallable yield notes linked to Meta Platforms, Inc. Two days later, the issuer brought to market $277,000 of CS Notes due June 13, 2024 linked to the S&P 500 index.

Finally, on March 14, or five days before the deal with UBS, Credit Suisse issued $400,000 of two-year contingent coupon autocallables tied to the S&P 500 index.

March business

So far this month, Credit Suisse also priced eight issues of callable fixed rate securities with maturities ranging from one to five years totaling $9.63 million. Those lightly structured notes (no underlying but a simple call option) are not included in Prospect News’ data. Those deals priced on March 13 except for the last one, which sold the next day.

It appears that Credit Suisse’s last trade date was March 14.

“Now it’s going to be under the UBS umbrella. But for debt holders of CS there is a change in credit. It probably requires a legal review. And such review process could take multiple months, which... I don’t know, may mean a lock up for investors,” said the trader.

But a lawyer who is not involved in the case but specializes in derivatives, did not agree.

“They won’t have to redo every filing. That’s very unlikely. They’ll probably file the information in their 6-K or 8-K,” he said.

The bank had nine pending trades due to price this month. The offering period was between March 7 and March 30 for pricing on March 31. Those deals were essentially one- to two-year leveraged buffered capped notes on the S&P 500, two of which included an absolute return feature.

Another offering consisted of three-year floating-rate notes linked to the Consumer Price Index due to price on March 29.

One fewer player

Some market participants also wondered about the impact of a missing issuer in an already small pool of banks.

In theory, less competition could mean less attractive terms for advisers. But the outcome could be different if new issuers jumped in the fray, filling the gap.

This is precisely what happened last year when Barclays stepped out of the market for nearly six months, allowing Canadian issuers to grab more market share, said the head of a structured notes desk.

The trader agreed. Given the small presence of Credit Suisse in the U.S. structured notes market, the impact would be minimal. And again, the impact may be a plus rather than a minus sign.

“We may see more issuers coming in, I don’t know, Asian banks or even regional banks,” this trader said.

“It’s a stretch of the imagination but conceptually it makes sense. Banks want to keep deposits and structured notes are sticky deposits.

“After all, if you want to issue structured notes, you need a good team and the ability to facilitate swaps. A lot of it can be done through a broker. It’s a complicated process but it’s not impossible. I’m not ruling that out,” he said.

Cash or no cash

Another possible development resulting from the recent banking turmoil would be a divide between the big commercial banks taking deposits from individuals versus the investment banks.

“With money flying out of the regional banks, JPMorgan, Bank of America and Wells Fargo have seen massive deposit inflows. Their funding rates may tighten as a result because they may not be so eager to attract more funds,” said Rosenberg.

“Other issuers like Morgan Stanley or Goldman who have not been in the receiving end of the regional bank runs may at the contrary offer wider funding rates,” he added.

And with it may come better terms.

But trends are hard to predict given that 11 among the largest banks came out last week with a $30 billion rescue package for First Republic Bank, he noted. Among those were Bank of America, Citigroup, JPMorgan Chase and Wells Fargo along with Goldman Sachs and Morgan Stanley.

“Who knows where they are and where the largest deposits are? Eventually, this whole crisis will come to an end. But it’s going to take some time,” he said.

The top agent last week was Royal Bank of Canada with four deals totaling $143 million, or 27.6% of the total.

It was followed by UBS and JPMorgan.

Royal Bank of Canada was the No. 1 issuer with $146 million in five deals, a 28% share.

© 2015 Prospect News.
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