Profit thanks to price crash
Credit Suisse rescue gives short sellers millions
03/20/2023, 7:17 p.m
Times of crisis on the stock market always offer gamblers opportunities to earn a lot of money quickly. Speculators are also trying to do the same with the struggling Credit Suisse. Not all bets work.
Securities of the troubled Credit Suisse (CS) had suffered a dramatic crash before the takeover of the major bank by competitor UBS was finally announced. After the rescue it went steeply downhill again. Bonds from the traditional bank also suffered sharp price losses. While long-term shareholders and bondholders suffer corresponding losses, such falls in prices open up opportunities for hedge funds and other speculators to make big bucks quickly — or gamble. They managed to do both around the end of Credit Suisse.
For example, the crisis brought short sellers millions in profits. Since the market closed last Friday, investors who had bet on falling prices have rallied nearly $430 million in shares listed in Switzerland and New York, according to data from financial analytics provider Ortex. As part of the rescue package negotiated over the weekend, UBS pushed through a price of just 76 centimes per share, well below the closing of Credit Suisse shares of 1.86 francs last Friday. On the stock exchange in Zurich, the paper fell by 60 percent on Monday alone, so that short sellers were able to post a profit of 388 million dollars there. Credit Suisse shares, listed on the New York Stock Exchange, fell 59 percent at the start of the week, giving short sellers there a profit of $42 million.
Credit Suisse shares have lost around 75 percent of their value since the beginning of the year. In 2022, it posted a loss of $7.9 billion, the highest deficit since the global financial crisis of 2008. After the collapse of Silicon Valley Bank, the situation at the Swiss bank, which was suffering from an enormous loss of confidence, escalated last week. Investors withdrew their money in droves. Finally, on Sunday, at the urging of the Swiss government, UBS agreed to acquire Credit Suisse in a deal worth CHF 3 billion.
After the deal was announced, UBS shares also fell as much as 10 percent at the start of the week. While Credit Suisse was the best bet for short sellers, they could still make a $22 million profit from UBS’s fall, Ortex said. “The number of Credit Suisse shares on loan has nearly tripled in a week.” Troubled First Republic Bank was also among the most profitable short bets in recent days. Here they booked profits of 53 million dollars since Friday.
Risky bonds become completely worthless
Fixed-rate Credit Suisse bonds also fell sharply last week, as some investors feared the bank would go bankrupt. Others saw exactly that as an opportunity. Because they assumed that the Swiss authorities would do everything they could to prevent the bankruptcy of the traditional bank, and they bought the corresponding bonds. According to a report by the “New York Times”, at least two US companies specializing in high-risk debt securities have struck at Credit Suisse. Depending on the type of paper, however, this bet ended with the opposite result.
Ordinary bonds issued by the bank, which were available for around 60 cents on the dollar face value last week, rose sharply in value after the acquisition was announced. Because with the bailout, which came about under government pressure, the probability that these debts will be repaid in full increased by leaps and bounds, according to investors.
Other bonds, called mandatory convertible or AT1 bonds, were even cheaper. Last week they were temporarily traded for only 20 percent of their original value. So the potential gain was even greater. However, these papers are riskier than ordinary bonds because, according to the terms of the transaction, in the event of impending bankruptcy, the debt can be converted into the bank’s equity and the creditors lose their claims. That is exactly what the Swiss financial regulator ordered as part of the deal negotiated with UBS over the weekend. Bonds with an original value of CHF 16 billion became worthless in one fell swoop. Investors who bet on the AT1 bonds lost their entire stake.