Credit Suisse has securitized a portfolio of loans tied to the yachts and private jets of its wealthiest clients, in an unusual use of derivatives to offload the risks associated with loans to ultra-wealthy oligarchs and entrepreneurs.
The Swiss lender, which has endured a murderous year marked by repeated scandals, quietly sold a $2 billion risk tranche of its “ultra-high-net-worth” customer loans at the end of 2021.
The securitization of the portfolio of loans to tycoons and oligarchs backed by their “jets, yachts, real estate and/or financial assets” was carried out by a unit of the bank that had previously been plagued with sanctions-related issues.
An investor presentation for the deal, seen by the Financial Times, explains that one of the main objectives of this division is to “create a positive brand image of CS by financing constituents’ preferred business tools (corporate jet ) and luxury toys (yachts).”
While banks routinely engage in these so-called “significant risk transfer” transactions to reduce the capital they hold against loans, derivative transactions typically involve corporate or mortgage portfolios that make up the bread and the butter of bank loans.
The nature of the underlying collateral meant that Credit Suisse had to offer a sky-high interest rate of more than 11% to lure a handful of hedge funds into the $80 million deal, an indication of the price the bank is willing to pay to improve. its capital position without resorting to public stock markets.
The investor presentation of the deal also lifts the lid on the Swiss bank’s private banking division, detailing some of the closely guarded business secrets of its international wealth management franchise.
A slide reveals that in 2017 and 2018, Credit Suisse experienced 12 defaults on its yacht and aircraft loans, a third of which “related to US sanctions against Russian oligarchs. News reports at the time indicated that Oleg Deripaska and brothers Arkady and Boris Rotenberg had to terminate private jet leases with the bank.
The same slide explains an increase in defaults on Credit Suisse mortgages during those years because some customers “were not particularly happy with the bank” as it pulled out of certain markets.
While Credit Suisse has a long history of providing loans to fund private jet purchases for billionaires, its foray into yacht finance is relatively recent. The slides show that he only started lending against yachts in earnest in 2014, but has rapidly grown his business, with outstanding loans exceeding $1 billion last year.
The portfolio also includes loans against high net worth clients’ stock and bond holdings, as well as their private equity and hedge fund holdings. The slides show that on the latter, the bank is sometimes willing to offer 80% leverage on their positions, which they acknowledge to be “above the norm”.
The presentation adds that “loan catalysts” for these clients may include a “change in personal circumstances” such as a “divorce.”
The $80 million notes are listed on the Channel Islands International Stock Exchange, an exchange that gained notoriety for its role in the Neil Woodford scandal, but is often the venue of choice for niche debt transactions. .
Credit Suisse declined to comment.