Credit Suisse Group AG (NYSE:CS) is a financial firm based out of Zurich, Switzerland. The company operates three main segments:
- Private banking, wealth management
- Investment banking
- Shared services (services and business support for the bank's two divisions)
Investors reviewing upper medium rated investment grade corporate bonds, will notice large financial service companies like Goldman Sachs (NYSE:GS) and Wells Fargo (NYSE:WFC) top the list for yield. However, Moody's is reviewing both companies for a possible downgrade.
Credit Suisse did well during the economic downturn, their bonds yield less than competing financial companies. Credit Suisse currently has a stable outlook from Moody's, S&P and Fitch.
Notice how Credit Suisse bonds compare to Goldman and Wells Fargo. I've also added Dignity Healthy and AT& T (NYSE:T) bonds:
|Credit Suisse New York Branch Sr Nt 2.15% 2023, Mnthly Cpn (cusip: 22546TU66)||A1/-||$86.50||3.89%|
|Goldman Sachs Grp Inc MTN Be Fr 4.75%0 2024, Survivor Option, Mnthly Cpn (cusip: 38141EQ28)||A3/A-||$104.00||4.27%|
|Wells Fargo Co MTN Be Fr 4.125% 2023 (cusip: 94974BFN5)||A3/A||$100.16||4.10%|
|Wells Fargo Co MTN Be Fr 3.45% 2023 cusip:94974BFJ4)||A3/A||$95.66||4.01%|
|Dignity Health Tax Bd S-2012 3.125% 2022, Make Whole Call||A3/A||$93.37||4.01%|
|At&T Inc Glbl Nt 2.625% 2022, Cont Call 09/01/22@Par, Cond Call, Make Whole Call (cusip: 00206RBN1)||A3/A-||$89.98||3.94%|
The Credit Suisse 2023 bonds' pricing supplement states:
Monthly on the 25th day of each month, beginning on February 25, 2013, through and including the Maturity Date, subject to adjustment in accordance with the Modified Following Business Day Convention.
It is also worth noting, the paperwork (final pricing supplement pdf) on these bonds diverges from the above listing:
Issuer: Credit Suisse AG ("Credit Suisse"), acting through its Nassau Branch
Whereas the listing (on two major brokerage bond platforms) attributes them to Credit Suisse New York Branch. This discrepancy may be due to a simple transcription error, and may not have a different tax implication. I talked to the office of one of Credit Suisse's managing directors in New York to inform them of the discrepancy, though they offered no clarification.
The bonds' pricing supplement states:
Material United States Federal Income Tax Considerations
In the opinion of Davis Polk & Wardwell LLP, acting as special tax counsel, for U.S. federal income tax purposes, the securities will be treated as fixed rate debt instruments... interest paid on the securities should generally be taxable to you as ordinary interest income at the time it accrues or is received in accordance with your regular method of accounting for U.S. federal income tax purposes.
The Bahamas does not have a withholding tax on dividends or interest. The New York and Nassau branches are both parts of Credit Suisse Group, and both branches have "independent status for certain tax and regulatory purposes."
It should be noted, Fannie Mae recently included Credit Suisse in a lawsuit over alleged London Interbank Offered Rate (LIBOR) manipulation, against several major financial firms. Though Fannie Mae lost a lot, and the economic problems in 2008 were dire, lawsuits like these sound like "just another day on Wall Street."
Major settlements can affect the banks, though Credit Suisse seems to have an ace up its sleeve. The company's leadership appears strong, and the business appears to be thriving as the global economy has risen (some say artificially.)
Credit Suisse Yield Attractive As Treasury Rates Rise
In the short time since Credit Suisse issued these bonds, with a very low 2.15% coupon, they have dropped to $86.50. They also carry a slightly higher, more stable, credit rating compared to similar bonds in the industry.
The Credit Suisse 2.15% 2023 bonds pay $1.79 per bond a month. They should also generate about $130 per bond, by the time they reach maturity, accounting for discount to par.
Large financial firms, with a few exceptions, carry substantial debt. However, some of the seemingly stronger financial companies have more cash than debt. Take a look at Credit Suisse, Goldman Sachs and Wells Fargo's debt to equity ratio:
CS Debt to Equity Ratio (Quarterly) data by YCharts
Now, let's look at EBITDA:
CS EBITDA (TTM) data by YCharts
Now, look at a net income (trailing twelve months) comparison:
CS Net Income (TTM) data by YCharts
Credit Suisse may appeal to some investors, because the company is headquartered in Switzerland. You see Credit Suisse trails Goldman, and Wells Fargo's EBITDA and net income, based on the graphs, appear to be outperforming.
Take a closer look at Credit Suisse's net income:
CS Net Income (TTM) data by YCharts
I look to net income because when I consider a company's stock or bonds, I want a sense of overall profitability. Notice Credit Suisse's net income was in a state of decline from mid 2010 towards the end of 2012.
One Important Question
The most important question investors should ask right now is: Whether $1.79 a month is worth $875 (with commission) per bond -- in addition to current discount to par. The discount to par accounts for approximately $1.18 a month by 2023. So, the total potential yield is around $2.97 a month per bond. Given the fact these bonds mature in only 10 years, and a short while ago, decently rated 30-year bonds barely yielded 4%, this is not as bad as you might think.
Another important consideration is the fact the 10-year treasury rate hit 2.98% on September 5, 2013, and has dropped to 2.57% (October 31, 2013.)
Source: U.S. Treasury Resource Center
Now, look at the past three months:
Source: U.S. Treasury Resource Center
This may not look dramatic, however, it is. Think about the difference between getting an 87% on a test, versus getting a 100%.
The treasury rate recently sank 13% in two months, and in September a few Aaa/AAA rated corporate bonds offered yields close to the yields of the financial company bonds today. This is one reason, why today, bond investors might look to the higher yields offered by more complex financial companies.
While S&P lowered credit ratings for certain Credit Suisse bonds in early January 2012, the ratings agency lowered Credit Suisse's overall rating in July 2013:
S&P lowered its long-term ratings on the holding companies of Barclays and Credit Suisse to A- from A, while Deutsche Bank was cut to A from A+. Subsidiaries including Barclays Bank Plc and Credit Suisse AG were lowered to A from A+.
Credit Suisse's quarterly filings show total assets have declined:
|3Q '13||2Q '13||3Q '12|
Conversely, net income was $454M in the third quarter of 2013, compared to $254M in 2012.
The economy and certain areas of business productivity are beyond a large financial company's control. Though businesses generally attempt to sustain higher credit ratings, so they can borrow for less.
Investors looking for discounted bonds with monthly taxable income may find the 2.15% Credit Suisse 2023 bonds appealing. Keep in mind ten of these bonds would cost $8,750, and generate $215 a year.
Especially since competing financial institutions are being reviewed for downgrade Credit Suisse may stand out. Some investors, myself included are dissuaded by the constant complicated shenanigans large financial groups have embroiled themselves in. Still, where there is yield, there will always be speculators.
It is important to determine whether a given portfolio, can absorb an investment's risks. These Credit Suisse bonds were issued with a very low coupon, now they are priced at $86.50 and make no mistake, any negative rating action would affect the price further. Additionally, while the market has soared, there continues to be uncertainty as to the direction of the economy.
These bonds should only be considered by investors with proper diversification. I find, mutual funds offer sufficient diversification. While an investor might plunk down $8,750 for a few bonds; that same amount in a balanced mutual fund offers far more diversification. So, I would only consider bonds, such as those issued by complex financial companies, if they represented a small percentage of a portfolio with greater exposure to higher quality companies.
If you have any thoughts on Credit Suisse Group leave a comment below.