The Night They Drove Ol’ Credit Suisse Down

CS stock is down over 5% in pre-market trading (ADRs) to a new record low…

Market cap to $11 billion.

Per ZeroHedge:

And CS credit risk has spiked to record highs this morning, topping 280bps at one point – basically disallowing the company from any investment banking business. This is higher than the bank’s credit risk traded at the peak of the Lehman crisis…

While the credit default swap levels are still far from distressed and are part of a broad market selloff, they signify deteriorating perceptions of creditworthiness for the scandal-hit bank in the current environment. There is now a roughly 23% chance the bank defaults on its bonds within 5 years.

The relationship between debt risk, equity price (lower price, less asset value to cover debt, higher credit risk), and equity risk (higher equity risk, higher asset risk, higher credit risk) is a complex one – but one that nevertheless is tradable, by so-called capital structure arbitrageurs. The chart above shows a simple ‘implied spread’ derived from the the company’s equity price and volatility. As can be seen, it is well below the current spread trading in professional markets.

This means one or more of these three things: the credit risk premium in the market is too high, the equity price is too high, and/or the equity volatility is too low.

Take your pick.

We note that during a carefully worded and defensive segment this morning on CNBC, they cited sources as saying Credit Suisse liquidity position is strong.

Additionally, several market participants (and freshly minted experts in CDS that seemed to suddenly appear on Reddit) sough to dismiss the moves. However, we do note that infamous credit arbitrageur Boaz Weinstein did speak up too, suggesting there was scaremongery afoot…

“It’s a time I remember oh so well.”