Credit Suisse executives have calculated the Swiss bank’s clients could lose up to $3bn from the frozen funds linked to collapsed specialist finance firm Greensill Capital, an amount equivalent to the lender’s entire net income last year.
The lender has spent three weeks trying to unravel a slew of contracts that underpin the supply-chain finance funds, which stood at $10bn when they were suspended on March 1.
The funds were marketed to Credit Suisse’s professional clients as low-risk products that offered a higher return than cash deposits. But several of the businesses that Greensill lent money to have indicated they are unable or unwilling to repay the debts, according to people briefed on the discussions.
More than 1,000 investors are trapped in the funds. Credit Suisse has already returned $3.1bn to them and plans to pay back a further $1bn in early April, according to people with knowledge of the plans.
GFG Alliance, the steel empire run by industrialist Sanjeev Gupta, collectively owes $1.3bn to the funds and has indicated it cannot pay them back. Bluestone Resources, the US coal mining group founded by West Virginia governor Jim Justice, has also said it was “not capable” of repaying $850m.
Credit Suisse executives do not expect to receive up to $400m lent to Katerra, a SoftBank-backed construction start-up. SoftBank pumped money into Greensill last year to cover debts at Katerra, but it did not reach the Credit Suisse funds, the Financial Times reported last week.
There are several other creditors that are “dragging their heels” on repaying the Credit Suisse funds, according to a person briefed on the process of recovering the assets. That brings the maximum exposure at around $3bn — just ahead of the bank’s net income last year, which was $2.9bn.
“I would stress that is the theoretical maximum,” said a person involved in the discussions. “I still expect losses to be much lower . . . It could be a long process though.”
The bank’s executives are confident the fund’s losses could be reduced to between $1bn and $1.5bn after some money is paid back, other assets are recovered in the courts and insurance pays out.
The full losses may not be fully known for months or even years as insurers and lawyers contest the contracts underwriting the funds.
Credit Suisse managers have discussed potentially compensating investors for part of their losses, which Reuters reported could be as much as 50 per cent. But senior executives are wary of doing so as it could invite lawsuits from the bank’s shareholders and increased capital buffers from Finma, the Swiss financial regulator.
Credit Suisse conceded last week that some of its funds’ investors had threatened litigation, adding that the fallout from the crisis could lead to “material” financial losses, client desertions and tumbling assets under management.
Investors have already enlisted law firms in Zurich and London to initiate claims against the Swiss lender to recover potential losses.
Credit Suisse declined to comment.