But the details of the share sale, which the bank released on Monday, leave investors with no real choice at all. The fund raising kicks off with new shares for a group of strategic investors led by state-controlled Saudi National Bank, who together will put in about $1.8 billion for a 14.8% stake.
That’s to be followed by a $2.2 billion rights issue. That stock will be priced at just 2.52 Swiss francs ($2.51) per share, which is a 32% discount to the theoretical share price after all the new equity has been sold and based on the average share price over the final two days of last week. Having already seen new investors take a large stake, the rights issue will further dilute the claims of each share over Credit Suisse’s profit or book value by 22%.
Together, all the new shares lead to bottom-line dilution of earnings per share of almost 34%. That sounds horrible until you look at the dilution if shareholders don’t approve the strategic stake sale, which they are due to vote on at a Nov. 23 meeting. Without the Saudi-led group, Credit Suisse would have to issue even more shares to raise the $4 billion it needs through a rights issue alone. The full dilution then would be 40%.
Credit Suisse stock has crumbled as executives struggled to deal with long-running scandals and losses, while investors lost faith in its ability to turn things around. After Thursday’s strategy reveal, the shares closed at their lowest price in more than 30 years, down more than 57% in 2022. They trade with a valuation of just 25% of forecast book value, the worst of any major bank in Europe by some way.
What investors own right now – and what they are being offered more of – is really an option on the idea that Credit Suisse has hit rock bottom. That option looks cheap relative to book value, but not so cheap relative to forecast earnings per share after the dilution.
Credit Suisse will get its $4 billion. The rights issue is fully underwritten by the very large group of banks hired to share the burden. If shareholders balk and banks have to put up the cash, they’ll sell the stock to all comers and the pricewill likely get hit hard. The choice for existing shareholders is go along with the full plans and suffer a lot, or refuse one or more parts of it and suffer even more.
More From Bloomberg Opinion:
• Credit Suisse’s Journey Is More of a Grail Quest: Paul J. Davies
• Matt Levine’s Money Stuff: First Boston Gets a Second Chance
• Credit Suisse’s Gulf Suitors Need to Be Smarter: Anjani Trivedi
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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