Credit Suisse is not announcing its bonuses for some weeks, but details are dribbling out ahead of time.
This morning, it emerged that CS is planning to repeat the immense success of its toxic bonus scheme ‘PAF’ (the $5bn ‘Partner Asset Facility,’ up 75% in three years), with PAF2, another derivatives-based bonus scheme, which will account for part of this year’s bonus.
– Fully mature in 9 years
– Pay a 5% annual coupon for Swiss franc holders
– Pay a 6.5% annual coupon for US dollar holders and people with holdings in all other currencies
– Be comprised not of distressed corporate bonds and bonds backed by commercial mortgages like PAF1, but of 94% investment grade products offering exposure to, “800 entities spread across industries and geographies.
As such, PAF2 is not expected to offer the enormous returns of PAF1. But the 5-6.5% coupon is seen as attractive and headhunters say Credit Suisse people are comparatively pleased.
“I spoke to someone this morning who was quite happy about it. He says it as quite an inventive structure. Credit Suisse are taking the first $500m of losses, which makes it more favourably structured than PAF1, although there’s less upside,” says the head of one search firm.
Less favourably, PAF2 recipients are locked in four years. It’s not clear how much of this year’s bonus PAF2 will comprise, but recipients could see comparatively little of their awards for 2011 before 2015.
Overall, Credit Suisse has been quite clever with its use of bonuses to clean its balance sheet. PAF2 reportedly offloads 18% of the credit exposure in its derivatives business. Last month, CS allowed its employees to invest $450m in a pool of residential mortgaged backed bonds. Employee demand for shares in this fund apparently exceeded the number of shares available.
The cash cap
While Credit Suisse bankers are allegedly very happy with PAF, PAF2 and their mortgaged-backed investments, they are apparently less happy with talk of a cash bonus cap.
Headhunters claim this is being put at $140k, marginally higher than the $125k at Morgan Stanley, but still low enough to cause problems for some.
“A $140k cash bonus cap is pathetic,” says one headhunter. “People with children at school are going to really struggle.”
However, another headhunter says cash caps are the new way of the world: “Cash caps of between $140k and $200k are going to be common everywhere this year,” he predicts.
Credit Suisse is also thought to have retained the cash bonus clawback it implemented last year. This allows it to clawback the cash element of the bonus from anyone leaving within two years of its receipt, and has been emulated by Jefferies. Credit Suisse didn’t respond to a request for comment.