As credit fears persist, Credit Suisse will buy back $3 billion in debt and sell a landmark hotel

As long as credit fears remain, Credit Suisse will buy back $3 billion in debt and sell a famous hotel.

Credit Suisse, a bank in trouble, said Friday that it would buy back up to 3 billion Swiss francs ($3.03 billion) worth of debt securities. The bank is trying to deal with a falling share price and an increase in bets against its debt.

The Swiss bank also confirmed that it is selling the famous Savoy Hotel in Zurich’s financial district.

Credit Suisse said in a statement about the offer to buy back debt on Friday, “The transactions are in line with our proactive approach to managing our overall liability composition and getting the most out of our interest costs. They also let us take advantage of market conditions to buy back debt at attractive prices.

It comes after Credit Suisse’s shares briefly hit an all-time low earlier this week and credit default swaps hit a record high because the market was worried about its future.

After a string of scandals and risk management failures, the lender is starting a huge strategic review with a new CEO. On Oct. 27, when it reports its quarterly earnings, the company will give an update on its progress.

The scandal that cost the bank the most money was its $5 billion bet on the hedge fund Archegos, which went bankrupt in March 2021. Since then, Credit Suisse has changed its management team, stopped buying back its own shares, and cut its dividend as it tries to fix its future.

Moving Markets

On Friday, the bank announced a cash tender offer for eight senior debt securities denominated in euros or pounds, worth up to 980 million euros, and 12 securities denominated in U.S. dollars, worth up to 2 billion dollars. The deadlines for the offers on the debt securities are November 3 and November 10, respectively.

After the news came out Friday, Credit Suisse shares went up more than 7%, but they are still down about 50% for the year.

Analysts have pointed out that capital buffers are much higher now than they were during the global financial crisis of 2008. This may bring back memories of that time.

MSCI Research also said in a note Thursday that, even though the number of credit default swaps is high compared to the past, especially for Credit Suisse and Deutsche Bank, it does not yet mean that a sectorwide default is coming soon.

Credit spreads for Credit Suisse and Deutsche Bank have reached levels that have never been seen before. Credit spreads for other large European banks have also grown, but MSCI says that the slope of credit spread curves has generally gotten steeper instead of getting flatter.

“An inversion of the curve would show that investors are worried about short-term defaults, and this was seen across banks in 2008.” The curve has only flattened recently at Credit Suisse, which is a big bank, “said Gergely Szalka and Thomas Verbraken of MSCI Research.

“A standard model that uses current CDS pricing shows that Credit Suisse and Deutsche Bank have a market-implied six-month default probability of about 2% and 1%, respectively, and a five-year default probability of 23% and 17%, respectively.”

Even though they were high, Szalka and Verbraken said that these market-implied probabilities did not point to an imminent default in the short term. However, the market was more worried about the long-term health of both banks.

“All of this means that, based on the market data, a Lehman moment for European banks doesn’t seem likely for the time being,” they said.

Johann Scholtz, an equity analyst at Morningstar, told CNBC on Friday that Credit Suisse’s decision to buy back its debt was a “positive” sign that it is “not in dire straits” in terms of liquidity.

He also disagreed with the idea that the sale of the Savoy Hotel in Zurich was a “dash for liquidity.” He said that the money made from the sale would not be enough to solve any big liquidity problems.

“I think it’s safe to say that there will be a lot of write-downs in the third-quarter results.” I think they’ll probably try to sell the “kitchen sink” because I think that’s what the market wants,” said Scholtz.

I think they might sell this hotel because there are going to be a lot of one-time costs in all of that. For what it’s worth, if they can make a profit on selling the hotel, it might make that position look a little better.

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