Archegos, a U.S. hedge fund, reportedly ran a concentrated, levered stock portfolio of U.S. media and Chinese technology firms, which last week incurred substantial trading losses and margin calls from its largest prime brokers. The trading losses seem to be linked to an equity capital raise on March 22 for a U.S. media company that resulted in a 30% share price decline in three days. On March 24, U.S.-listed Chinese technology shares were down after the SEC confirmed that some could be de-listed under the Holding Foreign Companies Accountable Act.
Prime brokers Goldman Sachs and Morgan Stanley, acted quickly, seizing the fund’s collateral and selling large blocks, thereby realizing higher prices and proceeds to cover exposures with minimal impact. Nomura and Credit Suisse had different outcomes, with both publishing negative trading comments this week. Nomura estimated its loss at $2 billion but said its capital position remains sound. Credit Suisse stated, without specifics, that it believes the financial impact could be “highly significant and material to its first quarter results.” Other banks including Barclays , Deutsche Bank and MUFJ were not materially affected.
In corporate bond markets, the reaction has largely focused on Credit Suisse, with its senior holding company bond spreads widening 30 to 40 bps this week and its U.S. dollar AT1 bonds declining five points. The non-affected banks have not seen any material spread widening.
Credit Suisse entered this situation with a strong capital position and is expected to generate positive underlying net income in Q1. The bank can also support its capital position by returning to regulatory capital the 2020 accrued but unpaid dividend distributions and share buybacks to date, and managing its balance sheet growth. It may also conduct an equity capital raise if the trading loss turns out to be at the high of estimates, rumored at $3 – 7 billion.
We think Credit Suisse will take the necessary action to ensure a strong capital position remains post confirmation of the trading loss, which will be supportive for its credit fundamentals and bond spreads. However, in our view, bond spreads are unlikely to fully recover to previous levels over the near term given concerns about the bank’s risk controls and potential for ratings downgrades.
Overall, the situation shows the importance of risk management at banks and that stakeholders must act promptly to protect a bank’s capital position during volatile market conditions. For Credit Suisse, it underscores that risk limits should be reinforced, and that its risk culture and controls will need to be reviewed and strengthened.