Credit Suisse Investors’ Choice: Big Loss or Big Loss

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Credit Suisse’s $4 billion fundraising was always going to be painful for shareholders, but with a steep discount on new shares, their choice is only how much of their ownership they want to lose.

The fundraising plan was unveiled last week alongside a high-risk strategic overhaul, which still promised a weak target of 6% return on tangible equity in three years, if things go as planned . This is well below the 10% cost of capital assumed for large banks. This means that Credit Suisse expects to destroy value once its restructuring is complete.

But the details of the stock sale, which the bank released on Monday, leave investors with no real choice. The fundraising kicks off with new shares for a group of strategic investors led by the state-controlled Saudi National Bank, who will together invest approximately $1.8 billion for a 14.8% stake.

This is to be followed by a $2.2 billion rights issue. This share will be priced at just 2.52 Swiss Francs ($2.51) per share, a 32% discount to the theoretical share price after the sale of all new shares and based on the average of the action over the last two days of last week. . Having already seen new investors take a significant stake, the rights issue will further dilute each share’s claim to earnings or book value at Credit Suisse by 22%.

Together, all the new shares result in a dilution of net earnings per share of almost 34%. It sounds awful until you look at the dilution if shareholders don’t approve the sale of the strategic stake, which they must vote on at a November 23 meeting. Without the Saudi-led group, Credit Suisse would have to issue even more shares to raise the $4 billion it needs through a single rights issue. The total dilution would then be 40%.

Shares of Credit Suisse tumbled as executives struggled to deal with long-running scandals and losses, while investors lost faith in its ability to turn the tide. After Thursday’s strategy reveal, stocks closed at their lowest price in more than 30 years, down more than 57% in 2022. They are trading at a valuation of just 25% of expected book value. , the worst of all the big banks in Europe by some way.

What investors have right now – and what more they’re being offered – is really an option on the idea that Credit Suisse has bottomed out. This option looks cheap relative to book value, but not so cheap relative to diluted earnings per share expectations.

Credit Suisse will receive its $4 billion. The rights issue is fully underwritten by the very large group of banks engaged to share the burden. If shareholders balk and the banks have to bring in the cash, they will sell the shares to all comers and the price will likely be hit hard. The choice for existing shareholders is to accept the full plans and suffer a lot, or to refuse one or more parts and suffer even more.

More from Bloomberg Opinion:

• Credit Suisse’s journey is more like a quest for the Holy Grail: Paul J. Davies

• Matt Levine’s Money Stuff: The first Boston gets a second chance

• Credit Suisse’s Gulf suitors must be smarter: Anjani Trivedi

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

More stories like this are available at bloomberg.com/opinion

Robert D. Coleman