Credit Suisse has securitised a portfolio of loans linked to its wealthiest customers’ yachts and private jets, in an unusual use of derivatives to offload risks associated with lending to 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 $2bn of its “ultra-high-net-worth” client loans at the end of 2021.
The securitisation of the portfolio of loans to tycoons and oligarchs backed by their “jets, yachts, real estate and/or financial assets” was made by a unit of the bank that has previously been plagued with sanctions-related issues.
An investor presentation for the deal, seen by the Financial Times, explains that one of the main goals of this division is to “create a positive brand impression of CS by financing the principals’ favourite business tools (business jet) and luxury toys (yachts).”
While banks regularly engage in these so-called “significant risk transfer” transactions to reduce the capital they hold against loans, the derivative deals usually involve staid corporate or mortgage portfolios that form the bread and butter of bank lending.
The nature of the underlying collateral meant Credit Suisse had to offer an eye-watering interest rate of more than 11 per cent to entice a handful of hedge funds into the $80mn transaction, an indication of the price the bank is willing to pay to improve its capital position without tapping public equity markets.
The deal’s investor presentation 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.
One slide reveals that in 2017 and 2018, Credit Suisse experienced 12 defaults on its yacht and aircraft loans, with a third of these “related to US sanctions against Russian oligarchs. Press 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’s’s mortgage loans in those years because some clients “were not particularly pleased with the bank” as it pulled back from certain markets.
While Credit Suisse has long provided loans to fund billionaires’ private jet purchases, its foray into yacht finance is relatively recent. The slides show that it only began lending against yachts in earnest in 2014 but has rapidly expanded the business, with its outstanding loans exceeding $1bn last year.
The portfolio also includes loans against wealthy clients’ holdings of stocks and bonds, as well as their holdings in private equity and hedge funds. The slides show that on the latter, the bank is sometimes willing to offer 80 per cent leverage on their positions, which it acknowledges is “above standard”.
The presentation adds that “lending catalysts” for these clients can include a “change in personal situation” such as a “divorce”.
The $80mn notes are listed on the International Stock Exchange in the Channel Islands, a bourse that earned notoriety for its role in the Neil Woodford scandal but is often the venue of choice for niche debt deals.
Credit Suisse declined to comment.