Credit Suisse will pay employee bonuses with a structured note, cutting the cash component of remuneration and in turn enhancing its own balance sheet.
Chief executive of Credit Suisse, Brady Dougan, said in an internal memo: "It is a very effective risk-reduction measure and the right thing to do in the current environment. It provides healthy coupons, provides a long-term incentive, and it helps the firm achieve its strategic goals."
SRP understands that the note's investment period will begin in March 2012 and run for nine years. It will pay a coupon of 5% for Swiss franc holders and 6.5% in dollars for others. A callable feature is implemented through which the bank can terminate the note after four years. The portfolio basket comprises a number of companies and countries and if one of these defaults, Credit Suisse will cover the first $500m of losses. Any further losses will reduce the principal value of the so-called PAF2 units, as it follows on a similar structured launched back in 2008.
"PAF2 is a risk transfer from the firm to employees. The structure results in a reduction in our risk profile, thereby helping to accelerate our strategic goal of risk reduction and capital efficiency. PAF2 represents an effective and real sharing of risk, but, nonetheless, we still need to reserve the right to amend this structure in the event of changing requirements" said Dougan.