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Credit Suisse bonds sink further into distress

Credit Suisse’s bonds slid further on Thursday, leaving them firmly in distressed territory even after the beleaguered lender turned to the Swiss central bank for support and said it would buy back SFr3bn ($3.2bn) in debt.

A Credit Suisse dollar bond maturing in 2027 gave up gains from earlier in the session to trade down almost 5 per cent on the day, at 66 cents on the dollar. Another dollar bond maturing in 2028 slid 13 per cent to just below 64 cents. The losses came despite a rebound in the troubled lender’s shares on Thursday.

Prices below 70 cents are generally perceived to be a marker of distress, implying a borrower is less likely to meet its payment obligations to debt holders. The bonds in question had been trading in the 80s and 90s, respectively, as recently as Monday, but have dropped sharply this week after the chair of Saudi National Bank, a major Credit Suisse shareholder, ruled out further investment in the Swiss bank.

John McClain, a portfolio manager at Brandywine Global Investment Management, said the bonds were responding to concerns about investors getting “bailed in”, whereby creditors could have their borrowings written off to shore up the bank’s finances.

He added that the “front end” — or the bank’s shorter-dated debt prices — remained “meaningfully inverted” relative to the longer end, maintaining a higher dollar price. “That’s pretty standard in a stressed and distressed types of scenarios,” he said, “because investors are thinking about buying claims in a restructuring as opposed to just looking for the best deal.”

The ructions also follow the failure of US institutions Silicon Valley Bank and Signature Bank in recent days, sparking fears over the health of the broader global banking system and sending shockwaves through financial markets.

Credit Suisse sought to reassure investors late on Wednesday, announcing plans to borrow up to SFr50bn from the Swiss central bank and buy back some of its own debt to improve liquidity. The bank put out tender offers to purchase 10 dollar-denominated senior debt securities for up to $2.5bn, with maturities between 2023 and 2025.

It also offered to buy four euro-denominated senior debt securities for up to €500mn, with both offers expiring on March 22.

Some of the bank’s bonds turned higher on Thursday, with a dollar instrument maturing in May 2023 — included in the list to be repurchased by Credit Suisse — adding 4.7 per cent to almost 97 cents on the dollar. The May bond is first in line for the bank’s buyback operation, followed by an August 2023 bond which was trading up more than 10 per cent on Thursday at 96 cents.

But the significant pressure on other Credit Suisse debt securities underscores persistent concerns over the bank’s liquidity and access to capital, after the collapse of SVB highlighted the ramifications of much higher interest rates. The tech-focused bank sold a portfolio of bonds at a steep loss after being hit by a rush of deposit outflows.

Credit Suisse has been rocked by various scandals in recent years, including the biggest trading loss in its 167-year history after the implosion of Archegos Capital and the closure of $10bn of investment funds tied to the failed finance firm Greensill.

The cost of buying insurance against Credit Suisse defaulting on its debt has soared higher in recent days, according to so-called credit default swaps tracked by Bloomberg. The bank’s five-year dollar CDS has climbed to more than 1,000 basis points this week, up from 462bp as recently as last Friday.

Credit Suisse’s bond moves on Thursday came even as its share price turned higher, closing up 19 per cent in Switzerland.

Rob Thomas, a credit analyst at T Rowe Price, said “a large part” of the share price bounce was “probably [people] taking off their shorts,” or bets on the stock falling. Removing those short positions after the Swiss National Bank stepped in had stabilised the equity, he said, but “you don’t really have a bounce on it after that”.

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