Credit Suisse faces reputational damage following Greensill collapse

Pension funds are closely watching how the fallout associated with Credit Suisse Asset Management's relationship with collapsed Greensill Capital may impact their allocations, the money manager and the wider hedge fund industry.

Parent bank Credit Suisse Group AG said on March 18 it would split out its money management unit from the international wealth management division and run it under a new CEO after liquidating about $10 billion in supply chain finance strategies. The strategies were run by CSAM with assets originated and structured by Greensill Capital, a U.K. and Australia-based financial services company that collapsed in early March.

Credit Suisse also warned of financial and reputational hits in the March 18 statement, and that it may lose clients and assets under management over the scandal. The bank is also dealing with the failure of Archegos Capital — a hedge fund that defaulted on margin calls made in late March by Credit Suisse and other banks — which it warned on March 29 "could be highly significant and material to our first quarter results." J.P. Morgan Chase & Co. analysts said in a note that press speculation that Credit Suisse losses could amount to $3 billion to $4 billion was "not an unlikely outcome," according to Bloomberg.

Credit Suisse first suspended trading for the four CSAM-run supply chain finance funds that contained Greensill-backed paper on March 1 due to valuation uncertainties. The funds had more than 1,000 investors, all of whom were institutional or professional investors.

On March 5, Credit Suisse said "valuation uncertainty with respect to certain investments, the reduced availability of insurance coverage for new investments and the substantial challenges to source suitable investments make it currently unachievable for the Credit Suisse supply chain funds to remain invested in accordance with their investment policies," resulting in CSAM fund boards deciding that the strategies "can no longer be appropriately managed." The funds were terminated March 4 and Greensill filed for administration in the U.K. on March 8.

The firm then said on March 31 it had created side pockets for four Credit Suisse Virtuoso SICAV — SIF strategies, run by Credit Suisse Asset Management where certain assets were invested in the now-terminated supply chain finance funds. Trading in these strategies was temporarily suspended on March 1. The side pockets, which contain the illiquid assets associated with the funds, will be liquidated and paid out in cash while trading of the liquid parts of the four strategies is set to resume April 7.

Pension fund and money management sources said they are closely watching the supply chain finance funds situation, although most of their relationships are for passive allocations — a part of CSAM that was unaffected by the Greensill-impacted funds. However, some also warned that the debacle may have wider-reaching effects — particularly since, in Switzerland at least, these funds are viewed as alternative investments and, in some cases, pension funds may have had indirect exposure through hedge fund-of-funds allocations, sources said.

"In terms of reputational risk, it is making a lot of noise — that is definitely not good press for Credit Suisse," said Fabien Delessert, member of the investment committee of collective occupational plans management firm FCT Foundations and head of pension and administration services at employee benefits firm Trianon SA in Renens, Switzerland.

"And now also if you look back at the trend in Switzerland, alternatives exposure is reducing: Hedge funds exposure has been significantly reducing over the last 10 years. Now we have this, Credit Suisse's own fund-of-fund exposed to the issue — and on the hedge fund side it is going to be another hit. It is bad press for this type of investment," Mr. Delessert said.

Swiss pension funds' alternatives allocations have remained steady at 31% over the last three years, according to the Thinking Ahead Institute's Global Pension Assets Study covering calendar years 2018, 2019 and 2020. Hedge fund allocations as a share of total alternative investments were not available.

Some Swiss pension funds' latest annual reports show reduced allocations to hedge funds as of the end of 2019, with Pensionskasse SBB, Bern, which had 18.3 billion Swiss francs ($20.7 billion) as of Dec. 31, 2019, noting that it reduced its hedge funds allocation to only 4 million Swiss francs, around zero, down from a 1.8% allocation a year earlier. And Pensionskasse Stadt Zurich, Zurich, which had 18.5 billion francs as of Dec. 31, 2019, had a 7.2% allocation to hedge funds as of that date, down from 9.3% a year earlier.

However, Mr. Delessert doesn't think any change in attitude toward hedge funds will be across all pension funds, but rather that "less experienced investors or boards of trustees in Switzerland will just link this to hedge funds. I think it will reinforce a bit at least for small investors, do I really want to (invest in) hedge funds in my portfolio? The impact will not only be on Credit Suisse, but the entire hedge funds industry — at least for small investors," he said.

Stefan Beiner, head of asset management and deputy CEO at Swiss federal pension fund PUBLICA, Bern, agreed.

Larger pension funds aren't expected to change hedge fund allocations because of the CSAM supply chain finance funds situation, he said. "Maybe for smaller investors or those with less resources, reputational risk is even more important and it might have an effect. It shows once again that it's very important to know what you have in the portfolio. However, this is often the case because over the last years the professional standard of investors has increased in Europe," he said.

The fund had 41 billion Swiss francs in assets as of Dec. 31, 2019.

The supply chain finance funds news may also trigger a change in the types of managers that Swiss funds delegate portfolio allocation to, Mr. Delessert said, adding that specialized firms may become more popular at the expense of "big asset management firms that simply invest in their own funds" under multimanager agreements.

Sources expect the reputational effects on CSAM and the parent bank itself to be greater than any financial hits.

The money management business has "a relatively small direct share of about 5% of adjusted (group) revenue," said Ioana Sima, director-banks EMEA at Fitch Ratings Inc. in London. The ratings agency's base-case is that the group rating will stand, but it may be hard to improve.

There probably is some litigation coming from investors, which may result in costs for Credit Suisse, "and while there's the uncertainty and negative publicity, there may be repercussions that make it harder to achieve the profit growth ambitions they have in asset management and maybe into the international wealth management division. There is a risk of reputational spillover into other businesses."

The separation of the money management unit — which had 440 billion Swiss francs as of Dec. 31 — "will allow high management to have a better oversight and it raises a bit their profile in the context of looking into what could have gone wrong, if there were any governance issues or failures in the process. It makes sense it gets separated out and gets proper attention so that this matter is investigated properly and then put to rest," Ms. Sima added.

The move to separate the asset management business "was a quick change," Mr. Delessert said. "Whether it's really going to work, I'm not so sure because at the end, (it may be) two entities but it's still the same firm."

A number of pension funds with allocations to CSAM said they are watching the situation but not putting the firm officially on watch.

As a collective foundation, FCT clients either pick from pre-selected strategies or create their own allocations, Mr. Delessert said.

"We were lucky enough not to have any exposure to these supply chain funds — (client assets are) mostly on the passive side in Switzerland. On the other side where clients select their own, we implement risk management procedures to check that choices are not too far away from investment best practices."

There, one client was invested in one of the supply chain finance funds affected, but through a multimanager hedge fund run by Credit Suisse. "But the exposure is really small — maybe 6% of the multimanager fund."

Credit Suisse has said proceeds from redemptions will be paid out to investors in several installments, with the first amounting to about 80% of available cash and cash equivalents on March 8.