November 16, 2022

Breakingviews: Credit Suisse’s fuzzy Apollo deal better than none

by Breakingviews.

Credit Suisse updated investors on its efforts to offload a chunk of its investment bank on Tuesday, even though it didn’t have much to say. Yet one word in an otherwise fuzzy statement – “premium” – shows that the whole exercise was probably worthwhile for Chief Executive Ulrich Körner.

The $12 billion Swiss bank said that it was offloading about $55 billion of assets in its securitised products unit, chiefly to Apollo Global Management, as part of a wider plan to shrink the bits of investment banking that don’t help its core wealth business. But it remained silent on key financial details, including the price. The U.S. buyer, which already has about $523 billion of client money, will also manage the remaining $20 billion of Credit Suisse’s packaged loans and mortgages, in return for a fee.

That deal structure will be a disappointment for any shareholders who were hoping for a quick, clean exit from the highly profitable division, which also structures credit-card receivables and other funky debt products. The Apollo deal and other smaller transactions will only reduce Credit Suisse’s risk-weighted assets by roughly $10 billion by mid-2023, which is less than half of the $22 billion that Körner said was sitting in the unit at the end of September. The rest will have to be wound down over time – and probably very slowly: Apollo’s asset-management arrangement will run for five years.

But there are also good reasons for the vagueness. Some of the underlying borrowers, for example, have to consent to the change of ownership, one person familiar with the matter told Breakingviews. And it’s possible that debtors could repay early. Both of those dynamics mean the amounts are a moving target. Credit Suisse also said that the final sale price will depend on discount rates. This suggests that it and Apollo could update the terms based on prevailing interest rates when they are ready to close the deal.

Still, investors already have the most important detail. Credit Suisse said in its statement the expected boost to its capital levels will depend on the premium that Apollo pays, which implies that selling at a discount is out of the question. Since Körner is selling from a position of weakness amid dicey markets, that represents a win for shareholders. Even a fuzzy deal is better than none.



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