A disappointing financial transaction in the US is symptomatic of the problems in Credit Suisse's investment banking. Signs of a capital increase are mounting. 

For Bank of America, Goldman Sachs, and Credit, the leveraged buyout of software company Citrix ended with a disappointing result. Orders for the two-part debt deal barely covered the $8.55 billion size.

Many large investors and hedge funds balked at lending money to the software company, according to a «Financial Times» (behind paywall) story citing people familiar with the matter.

Weak US Capital Markets

Generally, investors judge a bond deal to be healthy if orders are at least twice the size of the deal. The first of the two deals was for a $4 billion secured bond, which garnered $4.6 billion in orders. The second was a $4.05 billion term load which attracted $5.5 billion, according to the «FT».

With those results, the combined transaction that was seen as a test of US capital markets ended in a disappointing result.

Weak investor interest reflects the fragile state of US credit markets, which are the bread and butter of the buyout industry. Companies with low credit ratings are struggling to raise funds as the global economy slows and central banks raise interest rates to fight inflation, which in turn drives up borrowing costs.

Wrong Footed

The disappointing transaction result puts Credit Suisse in a bind at an inopportune time, which, along with the deal's lead banks, could be left sitting on a loan tranche if not enough creditors can be found for the Citrix buyout.

To be sure, that would be a blow to Credit Suisse, considered a big player in leveraged finance. It also gives further ammunition to critics who are calling for it to withdraw from many lucrative but risky areas of finance and return to its private banking roots.

Presently, Credit Suisse is undergoing a strategic review of its business, the progress of which it will announce on October 27 in conjunction with its third-quarter results.

Glorious Past

One result of the realignment could be that it split the investment bank into three divisions. That would mean the closing chapter of a saga that ironically began in 1990 with a huge credit loss at First Boston in the US.

At the time, the major Swiss bank decided to take the bull by the horns. It bailed out the investment bank, which was aggressively financing leveraged buyouts at the time, to the tune of nearly $500 million over a failed deal. The new entity announced its arrival on Wall Street by renaming itself Credit Suisse First Boston (CSFB).

Present Threats

Those days heady days are a thing of the past. Currently, under the leadership of Ulrich Koerner, Credit Suisse is feverishly engaged in cutting costs and eliminating business risks.

In investment banking, the sale of the securitized products business is to be examined. According to financial analysts, this area is estimated by the market to be worth up to 2.5 billion dollars.

Capital Increase Rumors

The magnitude of the crisis is illustrated by the Credit Suisse share price, which is still seeking a bottom after a long slide. In the last two days alone, the share price fell by another 10 percent on rumors of a capital increase and is currently trading below 5 francs.

With a sale and the reduction of risks, there could be a 4 billion hole for the upcoming restructuring, the growth plans in asset management, and the accumulation of equity.

Ironically, if spin-offs in investment banking do indeed occur and Credit Suisse no longer has a yardstick in the US, the new CEO could meet a fate similar to that of First Boston almost a quarter of a century ago.