Credit Suisse has securitized a portfolio of loans linked to its most affluent customers’ yachts and private jets in an unusual way of using derivatives to reduce the risks of the lending of ultra-rich oligarchs and entrepreneurs.
The Swiss lender, which has endured a bruising year marked by repeated scandal, quietly sold on a slice of the risk related to $2 billion (CHF1.85 billion) of its “ultra-high-net-worth” client loans at the end of 2021.
Securitization of the loan portfolio to oligarchs and tycoons that are secured by their “jets yachts, jets property, or the financial asset” was carried out by a department of the Bank which was previously plagued by sanctions-related problems.
An investor presentation on the deal, as seen through The Financial Times, explains that one of the primary goals of the section is “create an impression of brand value for CS with the help of financing primary companies most used business tools (business jets) and luxurious equipment (yachts).”
Although banks frequently use so-called substantial risk transfer operations to decrease the amount of capital they have against loans, derivative transactions typically involve a well-maintained mortgage or corporate portfolios that are the foundation of lending by banks.
The nature of collateral meant that Credit Suisse had to offer an eye-watering high-interest rate that was higher than 11% to draw some hedge funds to participate in the deal worth $80 million, which was a sign of the amount it was willing to pay to strengthen its capital position without tapping into public equity markets.
The investor presentation for the deal also revealed this Swiss Bank’s Private Banking division, revealing some of the most closely kept secrets of its Wealth Management franchise.
One slide highlighted that between 2017 and 2018, Credit Suisse experienced 12 defaults on its aircraft and yacht loans and aircraft loans, with three-quarters of these “related with US sanctions against Russian Oligarchs.” The press reports of the time stated that Oleg Deripaska and his brothers Arkady and Boris Rotenberg had to terminate leases on private jets at the Bank.
The slide also explains the increase in defaults on Mortgage loans from Credit Suisse during the years before because some clients “were not pleased with the institution” when it pulled back in certain areas.
Although Credit Suisse has long provided credit to help billionaires finance their private jet purchases, its venture in yacht financing is new. The slides revealed that the company only started lending to yachts in 2014 but has quickly grown the business, with outstanding loans reaching $1 billion in the last year.
The portfolio also contains loans against the wealthiest clients’ holdings of bonds and stocks and their investments in hedge funds. The slides demonstrated that in the latter, the Bank was willing to give the leverage of 80% on their portfolios that it said was “above the norm.”
The presentation also stated it was noted that “lending triggers” for clients include the “change in their circumstances” like”divorce” or “divorce.”
These notes, worth $80 million, are traded on the International Stock Exchange in the Channel Islands. This bourse gained notoriety due to its involvement during the Neil Woodford scandal but is typically the most popular venue for deals in niche debt.