QIA To Buy More of Credit Suisse Shares
Some good news for the trouble-riddled Swiss Bank, Credit Suisse. Qatar Investment Authority is going to buy an additional stake in the embattled financial institution. Along with QIA, Saudi National Bank will be buying a 9.9 percent stake in the institution as well.
Credit Suisse is in desperate need of additional funds so that it can raise 4 billion Swiss Francs and come out of the dark days of scandals and eroding investor confidence. It plans to completely overhaul the structure of the financial institution, offload riskier assets and perhaps even split the bank. Once Qatar Investment Authority and Saudi National Bank buy an additional stake, Middle Eastern investors will be holding a total of 1/4th stake in the bank.
In October, Credit Suisse announced that it would revamp the structure of the investment bank to make it leaner, fire almost 9000 employees globally, and cut costs to the tune of 2.5 billion Swiss Francs. The bank has a three-year roadmap before it completes these tasks.
Private Placement of Shares
Credit Suisse will initially raise funds in the form of the private placement of shares. Private placement is the form of selling equity shares to a selected number of companies or wealthy individuals.
Credit Suisse has scheduled an extraordinary general meeting on 23rd November during which this private placement of shares will take place. The total value of this private placement will be around 1.76 billion Swiss Francs. Saudi National Bank, Qatar Investment Authority, and a Swiss Group will take part in this share placement. According to sources, the Swiss entity is not a rival bank. Saudi National Bank will buy shares worth 1.5 billion and acquire 9.9% stake in the bank. Furthermore, it will also take part in the rights issue amounting to 2.24 billion Swiss Francs. A rights issue is the invitation of a company to its shareholder to buy additional shares at a discounted price to the current market level.
Harris Associates, the largest investor of Credit Suisse won’t be taking part in the private placement of shares. However, it will buy additional shares by participating in the rights issue. Olayan Group is going to do the same and thus retain its 5% stake in the company.
What Led To The Downfall of Credit Suisse?
Bad decisions and poor due diligence are the main reasons why Credit Suisse is in a tight spot. The bank that survived the 2008 recession became too ambitious and took too many risks leading to terrible damage to its reputation. Ironically, the bank has to spend more money in order to stop bleeding money. So what led to this situation?
- Credit Suisse invested around $10 billion in the supply chain financier, Greensil. The bank wanted to sell the supply chain receivables as bonds. However, the bankruptcy of Greensil played a spoilsport. Credit Suisse had to suffer a loss of $1.7 billion.
- The bank provided prime brokerage service (read loan) to Archegos Capital. When it collapsed, the bank suffered a loss of $5.5 billion.
- It is facing criminal charges for colluding with a cocaine trafficker.
- Then came the Mozambique Tuna bond scandal. A whopping $2 billion loan was handed out to Mozambique state officials without the approval of the parliament. When the scam came into light, the IMF and world bank suspended their financial assistance to Mozambique. The country defaulted on the loan repayment resulting in a severe economic crisis. Later, Credit Suisse had to pay a fine of $475 million and forgive $200 million worth of debt that the Mozambique government had to repay.
There were other scams as well. All in all, the bank was riddled with internal corruption, incompetent employees and a weak leadership.
Bottomline
The question remains, why is Qatar Investment Authority and Saudi National Bank buying additional stakes in a bank that is so deep in trouble? Some say that Credit Suisse is too big to fail. The Swiss government will offer a bailout programme instead of letting it collapse to prevent after effects in the market. Maybe Qatar is capitalizing on this aspect and buying additional shares at a discounted price. Only time will tell.
