Nov 15, 2022

Credit Suisse Agrees to Sell Large Chunk of SPG Unit to Apollo

Eyk Henning, Jan-Henrik Förster and Marion Halftermeyer, Bloomberg News

Signage hangs over the entrance of a Credit Suisse Group AG branch in Zurich, Switzerland, on Sunday, Sept. 25, 2022. Inflation in Switzerland has more than doubled since the start of the year and the State Secretariat for Economic Affairs expects it to come in at a three-decade-high of 3% for 2022. Photographer: Pascal Mora/Bloomberg , Bloomberg

(Bloomberg) -- Credit Suisse AG declined the most among major European banks after analysts pointed to the lack of financial details surrounding the agreed sale of a large part of its securitized products business to Apollo Global Management Inc.

The Zurich-based lender’s stock declined as much as 2.4% on Tuesday, making it the day’s worst performer so far among the Bloomberg Europe Bank and Financial Services index. The shares have lost more than half their value this year.

Credit Suisse said earlier it’s transferring a large portion of SPG assets to Apollo and other unnamed investors will likely take over some of the rest. The Swiss bank is providing financing for some of the assets being transferred and will release $10 billion of risk weighted assets after the deals, less than half the capital the business consumes.

“Although we welcome the partial SPG sale announcement, we are still missing key data points to fully assess the transaction,” JPMorgan Chase & Co. analysts led by Kian Abouhossein, wrote in a note to investors. “There is no P&L date or book value information. We were hoping for more details at this stage from Credit Suisse.”

The agreement removes one area of major uncertainty after Credit Suisse announced its strategic revamp last month, as the firms only had the rough framework of a deal at the time and investors feared it could fall apart amid last-minute negotiations. Still, given the deal unlocks only a partial amount of the capital SPG uses, Credit Suisse may be left with some riskier assets. It also raises questions as to whether it will be more difficult for Credit Suisse to reach its goal of cutting 40% of risk-weighted assets from the overall investment bank over the next few years.

The Apollo transaction, along with the expected sale of other portfolio assets, is expected to reduce SPG’s assets from $75 billion to $20 billion. Apollo is taking on most of the SPG team, Credit Suisse said, while the Swiss bank will also provide financing for a share of the assets being transferred, it said, without giving details. Apollo will manage the $20 billion of remaining assets under an expected five-year investment management deal.

And while Credit Suisse said that the deal would help bolster its CET1 ratio, a key metric of financial strength, it didn’t provide details on the overall benefit, which JPMorgan calculated could add about 50 basis points to its CET1. The bank also said that Apollo will pay a premium, without providing further details.

“We lack important financial details for an assessment of the transactions,” Vontobel analyst Andreas Venditti wrote in a note to investors. “Risk remains on Credit Suisse’s balance sheet.”

The SPG sale was a key pillar -- along with a $4 billion share offering -- of the Oct. 27 overhaul. The bank is seeking to shore up its finances and pay for a sweeping revamp that will involve deep job cuts and carve out of its investment banking unit as it seeks to pare risk.

Credit Suisse is seeking to return to profitability and put an end to a string of losses and reputational hits that have rocked the institution over recent years, from a damaging spying scandal to the huge losses caused by the Archegos Capital Management debacle.

The bank had previously said that it reached an exclusivity agreement with Apollo and Pacific Investment Management Co. for the acquisition of the SPG assets and other related financing businesses. The bank didn’t mention Pimco in the Tuesday statement.

The securitized products group, led since 2016 by New York-based trader Jay Kim, buys and sells securities backed by pools of mortgages and other assets, such as car loans or credit-card debt. The division also provides financing to clients who want to buy these products and will “securitize” loans -- dicing them into new securities of varying risk and return -- on their behalf and sell them to investors for a fee.

The lender was dealt a blow recently when S&P Global Ratings downgraded its long-term rating to just one level above junk status, citing execution risks in the restructuring plan.