Credit Suisse dropped exposure to Evergrande due to risk concerns


Updates from the Evergrande real estate group

Credit Suisse, once the largest international underwriter of Evergrande bonds, sold its entire exposure to the struggling Chinese real estate developer late last year, according to people familiar with the decision.

This decision will protect the Swiss bank from significant losses in the event of the default of the world’s most indebted developer. However, his past actions could raise new reputation issues, with the lender still reeling from the Greensill and Archegos scandals.

Over the past decade, Credit Suisse has helped arrange $ 4.6 billion in dollar bonds for Evergrande, about 13% of the total and second behind China Securities Co, according to Dealogic data. However, Credit Suisse took no debt for two years after worrying about the developer’s finances.

Of the bonds arranged by Credit Suisse, at least $ 4.2 billion is still outstanding. They have been sold to counterparties such as asset managers, hedge funds and the lender’s ultra-wealthy private clients, who could now be wiped out for fear that Evergrande would start missing payments on its international debt.

Credit Suisse decided to sell its own residual exposure within the investment bank, which it accumulated upon underwriting, because “he didn’t like what he was seeing,” people close to the bank said. case.

On Thursday, Credit Suisse informed its investors and asset management clients that the bank’s funds hold very little Evergrande debt and that the institution as a whole has minimal exposure.

In a statement, Credit Suisse said it “is not an existing lender of Evergrande and we have no direct exposure to the company.”

Internally, Credit Suisse has had doubts about Evergrande for at least three years, according to sources within the bank. One incident reported to senior management was a loan proposal to company president Hui Ka Yuan in late 2018.

Evergrande recently raised a $ 1.8 billion bond to help pay a special dividend to investors. Hui, then the third richest man in China, had to put in place $ 1 billion of his own money to support the deal due to lack of demand, the Financial Times reported at the time.

Hui then approached Credit Suisse for a loan that would be used to purchase Evergrande securities, offering the bond as collateral. When the deal was submitted for review, risk managers criticized the structure for having circular financing characteristics, those involved in the FT said.

They were also concerned about the company’s more than $ 100 billion debt, which then exploded to around $ 305 billion, including around $ 20 billion in international bonds.

“The transaction was bad financially and morally,” said one of the people. “Plus, Evergrande had the most fragile finances [among Chinese developers] and was clearly facing a cash shortage.

Ultimately, Credit Suisse rejected the loan and began cutting its investment banking relationship with Evergrande soon after. However, Hui continued to be a client of the private bank, the people said.

“The risk management procedures were really working back then. . .[but]it was a warning signal about the type of deals being made “by bankers and wealth managers in Asia,” they added.

Evergrande did not respond to an email request for comment.

While the largest international underwriter, Credit Suisse was far from the only western bank involved with Evergrande. UBS and BNP Paribas have also arranged obligations for the promoter. BlackRock, HSBC and UBS have direct exposure and they and their clients are now facing big losses after adding to their holdings of Evergrande bonds just months before their prices collapsed.

Credit Suisse’s past entanglement with Evergrande comes at a difficult time for the Zurich-based lender, which is already facing investor wrath and lawsuits for billions of dollars in potential losses after the $ 10 billion shutdown. dollars in funds linked to Greensill Capital.

Under the leadership of new president António Horta-Osório, it is overhauling its risk management systems and reviewing relationships with its clients after a loss of $ 5.5 billion due to the bankruptcy of Archegos Capital.

Other deals in the region that have deteriorated include China’s Luckin Coffee. Credit Suisse sponsored its initial public offering in 2019, only for stocks to plunge last year after fraud allegations, which caused family owners to default on a $ 518 million margin loan.

Additional reporting by Hudson Lockett in Hong Kong

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