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24 Jan 2012 By Agnes T. Crane

The Zurich-based group is known for tinkering with its payout schemes. In 2008, it foisted toxic bonds on senior bankers. Its latest innovation, bonus bonds referencing the firm’s derivatives book, looks positively pedestrian by comparison. There’s certainly no obvious upside.

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Credit Suisse told its managing directors and directors on Jan. 23 it would pay them a portion of their deferred bonuses in the form of fixed-income notes linked to derivatives in the bank’s portfolio. The 800 names referenced by the bonds represent about 18 percent of the bank’s derivatives credit exposure. Approximately 94 percent of the portfolio is investment grade, according to a memo from Chief Executive Brady Dougan obtained by Reuters Breakingviews.
The scheme is being called PAF2, a reference to the Partner Asset Facility Credit Suisse created four years ago. Participating bankers then were given shares in a fund housing toxic debt as part of their bonuses.
The PAF2 notes will pay a 5 percent coupon when denominated in Swiss francs and 6.5 percent when in dollars. Credit Suisse will absorb the first $500 million of losses in the portfolio.

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