Exclusive-Credit Suisse's Klein plans First Boston summit amid spin-out challenges - sources

By Sumeet Chatterjee, Andres Gonzalez and Tatiana Bautzer

(Reuters) - Credit Suisse Group AG's new investment banking chief, Michael Klein, is expected to lay out his plans for the division next week as questions linger about the spin-out's funding and structure, according to several people familiar with the matter.

Klein is expected to brief Credit Suisse's senior bankers at a meeting in New York on efforts to secure capital for CS First Boston (CSFB). He is also expected to provide detail on which Credit Suisse activities will go into the business and on plans for an eventual initial public offering (IPO) of the advisory firm, one of the sources said.

One option now under consideration is for CSFB, which will contain advisory and deal-lending businesses, to also house the Swiss bank's equity research operations, three of the sources said. This would help its investment bankers in their pitches to clients, especially for IPOs, one of the sources added.

Klein, a veteran dealmaker, is merging his eponymous investment banking boutique into Credit Suisse's investment banking operations to create CSFB as a standalone business which he will lead from New York. Klein is selling his business to Credit Suisse for $175 million, the two said earlier this month.

The CSFB carve-out is part of a sweeping overhaul by the Zurich-based bank to restore profitability after a string of heavy losses and scandals that threatened its survival. Credit Suisse will focus on managing money for the wealthy after the carve-out.

Many questions remain about the newly planned CSFB, including who will provide capital to allow lending for dealmaking and fund the business. The creation of a boutique advisory firm also coincides with a slowdown in mergers and IPOs as central banks' war on inflation roil markets.

A spokesman for Credit Suisse declined to comment, as did a representative for Klein.Credit Suisse said in October that merger advice and risky lending will go into CSFB while the bank plans to keep some securities trading activities, including equities.

If the Swiss bank's equity research operations also move to CSFB, it would be similar to Deutsche Bank AG, which exited equities trading but kept equity research when it undertook a deep reorganization in 2019.

Several sources said investment bankers did not know who would give Klein the money to get the business off the ground.

He has been pitching to potential investors a $500 million exchangeable bond to help fill CSFB's funding needs, and has been looking for capital providers to help fund the firm's lending for M&A, including leveraged buyouts of junk-rated companies, sources have said.

Apollo Global Management Inc has been exploring both of these options, one of the sources said. The private equity firm already has a partnership with Credit Suisse, helping it carve out another unit, its securitized products business.

But negotiations with Apollo over CSFB have dragged on for several weeks, and no deal is imminent, the source added.

Apollo declined to comment.

Credit Suisse Chief Executive Ulrich Koerner said in October the bank had a $500 million commitment for CSFB from an investor he didn't identify.

Some investors are not enticed by the terms on the $500 million exchangeable bond which they must swap into shares of CSFB if there is an IPO or sale, one person said. As it is currently structured, investors would have to convert their bond holdings into shares of CSFB when it is spun off, according to terms seen by Reuters.

One source familiar with the fundraising said some investors would prefer to have the option to decide whether or not they want to convert their holdings into CSFB shares.

KEEPING TALENT

Lingering uncertainty over the future of the spin-out, four months after Credit Suisse announced it, has weighed on the bank's ability to stem the loss of talent it has suffered in the last few years.

Dealmaker Cathal Deasy in January joined Barclays, just months after being promoted to regional co-head of Credit Suisse's investment banking & capital markets (IBCM) unit. Doug Crofton, the Swiss bank's co-head of global equities, quit to join Royal Bank of Canada this month. The bank has also seen a handful of departures in Asia.

Klein has been seeking to recruit bankers, hoping to attract some star dealmakers to CSFB ahead of its launch, one of the sources said.

Earlier this month, Credit Suisse informed many junior bankers they would receive their annual bonus over three quarterly instalments, an unusual move on Wall Street designed to make it more difficult for them to flee, two of the sources said.

Credit Suisse reported its biggest annual loss last year since the financial crisis and cut its bonus pool by 50% for 2022. Morale remains low and many are looking for new jobs, said a person familiar with the situation.

(Additional reporting by Stefania Spezzati in London and Abigail Summerville in New York; Writing by Greg Roumeliotis; Editing by Elisa Martinuzzi and Anna Driver)