Credit Suisse (
CS
) is looking to recreate the success of the two Expanded
Partner Asset Facility (EPAF) funds it created in 2008 and 2011
once again with the creation of the 'Plus Bond' scheme for about
2,000 of its top-level employees. The move will allow the second
largest Swiss bank to move risky assets out of its balance sheet
and hand out bonuses to its executives at the same time - a win-win
situation for both employer and employee.
While the size of the assets to be transferred to the bonus pool
is not clear, we believe it should be at least equal to $5 billion
- similar to the 2008 offering which had around the same number of
employees enlisted to it. Through its earlier schemes, PAF-1 and
PAF-2, Credit Suisse successfully offloaded risky assets worth
around $17 billion at a time when stricter capital requirements
were being imposed on the industry. No doubt, other investment
banks including Goldman Sachs (
GS
), Morgan Stanley (
MS
), Barclays (
BCS
) and UBS (
UBS
) have been keeping a close eye on these bonus funds and will
likely come up with similar schemes of their own over the coming
years.
We maintain
a $25 price estimate for Credit Suisse's stock
, which is around its current market price.
See our complete analysis of Credit Suisse
here
Here's How The Scheme Works
The beauty of Credit Suisse's asset-backed bonus fund lies in
the simplicity of the approach. First, the bank earmarks some of
its risky, hard-to-value assets (almost always part of its trading
assets) for transfer to an investment vehicle which will act as the
employee bonus fund. These assets, totaling around $5 billion for
PAF-1 and $17 billion for PAF-2, effectively move out of Credit
Suisse's own balance sheet and either appreciate or depreciate in
value as part of the fund over a fixed time period. Assets in both
the original schemes will be liquidated in 2016.
Then, based on the size of the assets it is transferring, Credit
Suisse picks the employees to whom the spoils will go. PAF-1 had
2,000 participants, whereas the bigger PAF-2 had 5,500
participants. The new scheme for 2012, Plus Bond, is expected to
benefit 2,000 investment banking employees at the level of managing
director and director.
At the end of the lock-in period, all the assets will be
liquidated and the cash raised will be distributed among the
participating employees.
And This Is How Everyone Benefits
The benefit for Credit Suisse is two-fold: it can move some of
its risky trading assets off its balance sheet, taking it closer to
the stringent capital requirement imposed by Swiss regulators, and
it also cuts down on employee compensation expenses by making the
asset-based bonus part of compensation along with cash and stock.
The bank has reportedly saved $1.4 billion on compensation costs
through its first two schemes - something that will clearly show as
an improvement in operating margins for its investment banking
business represented in the chart below.
As for employees, the bonus, although risky, represents a
potential to take home more money than they can get through a
regular stock based bonus payout. To illustrate this, it would
suffice to say that PAF-1 appreciated in value by almost 80%
between 2008 and 2012 - all of which will go to the employees. And
they obviously expect the newly setup scheme to also bring in
similar returns.
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