Credit Suisse CDS surge as hedge funds see potential trigger

AN ILLIQUID corner of swaps insuring Credit Suisse Group debt has surged back to life as some hedge funds make the case that they should be triggered.

Funds including FourSixThree Capital and Diameter Capital Partners have been buying swaps insuring Credit Suisse’s subordinated bonds with the idea that the controversial write-down of the bank’s Additional Tier-1 (AT1) securities qualifies as a trigger for them, according to people familiar with the matter. Law firm Kramer Levin is helping with efforts to make a case for a triggering event, said the people, asking not to be identified as the talks are private.

The swaps this week had their biggest increase since UBS Group agreed to buy Credit Suisse in an emergency weekend deal in March. As part of that acquisition, Swiss regulators forced the wipeout of about US$17 billion of AT1 notes. The swaps have jumped 85 basis points this week to 360 basis points, according to CMAI data.

Typically, market participants who believe that there’s been a breach of terms in the bonds will submit a question to the Credit Derivatives Determinations Committee in an attempt to trigger an insurance payout. The committee’s website showed no such submissions as at 8.30 pm on Wednesday (May 10) in New York.

Traders at JPMorgan Chase have held discussions with buy-side clients over the possibility of a trigger, fuelling some trading in the swaps this week, separate people briefed on the matter said. The JPMorgan traders were presenting the argument as one that some hedge funds are making, rather than the bank’s view, the people said.

Many investors in the AT1 bonds have separately brought legal challenges against the write-down decision, which regulators have argued was justified because the rescue deal involved state support.

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Representatives for FourSixThree, Diameter and JPMorgan declined to comment. A spokesperson for Kramer Levin did not respond to requests for comments. BLOOMBERG