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Credit Suisse operational risk cat bonds said unaffected by sale to UBS


The operational risk catastrophe bonds issued earlier this year that serve as a vehicle to channel capital market investor funding of operational risk insurance to investment bank and asset manager Credit Suisse are not expected to be impacted by the bank’s forced sale to rival UBS.

credit-suisse-logoBack in January, Artemis reported that $217.25 million of notes were issued by Operational Re IV Ltd., the latest and fourth securitization of operational risks in a catastrophe bond format to benefit the investment banking giant.

But with Credit Suisse subject to a forced sale to its Swiss rival bank UBS as the ripple effects of a banking crisis made the firm’s independence untenable, causing the write down of its AT1 capital securities, this isn’t seen as an event likely to trigger the Operational Re IV cat bond notes.

Speaking with Bloomberg, DBRS Morningstar’s Marcos Alvarez explained that his assumption is that the bonds would not be triggered by the forced merger.

More than one qualifying event is required to trigger the notes, as they provide aggregate indemnity insurance coverage for Credit Suisse’s operational risks.

In fact, Alvarez believes they are likely to be novated across to UBS, once its acquisition of Credit Suisse completes.

“Since these cat bonds were issued to reduce risk-weighted assets of Credit Suisse, I would assume UBS will keep the coverage,” Alvarex said.

We’d side with DBRS Morningstar’s view, but also add another possibility, that an early redemption of the operational risk notes could be a possible outcome, especially given novating them across to cover all of UBS’ operations might require some additional work to get the investors comfortable with that prospect, given the notes only covered Credit Suisse’s business before.

That could be defined by what happens ultimately with the insurance policy that Zurich provides to Credit Suisse, which the Operational Re series of cat bond notes served to collateralise part of in each issuance seen to-date.

Alvarez also told Bloomberg that, “FINMA’s decision to wipe out the full value of Credit Suisse’s AT1 bonds should not affect these cat bonds. I believe the cat bonds will not be triggered nor redeemed in the short term.”

Given the sale of Credit Suisse to UBS has seemingly been triggered by a crisis of confidence in the bank, rather than any issue relating to its holdings, investments, or any direct individual business practice event that has occurred this year, it seems likely Alvarez is correct and the operational risk cat bonds may avoid any exposure to this particular event.

The Operational Re IV cat bond issued this January cannot have any exposure to events that began in prior years either, meaning they are save from any issues related to Archegos, Greensill or other issues from prior years, despite them perhaps being considered pre-cursors to the crisis Credit Suisse faced that led to its forced sale.

Those events did drive some mark-to-market price declines for the previous iteration of the Operational Re cat bonds, but those notes were eventually redeemed at par and no exposure to those issues could affect the new issuance.

As we also reported this year, the new Operational Re IV cat bond notes terms exclude losses from any new operational risk event that has the same originating cause as one discovered prior to issuance, as well as any causally inter-related or inter-connected operational risk events.

You can read all about Credit Suisse’s Operational Re IV Ltd. deal in our comprehensive catastrophe bond and related ILS Deal Directory.

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