Credit Suisse Group AG bondholders suffered historic losses when a takeover by UBS Group AG wiped out about 16 billion Swiss francs ($17.3 billion) in risky notes.
The deal will trigger a “full write-down” of the bank’s additional tier 1 bonds to increase its core capital, Swiss financial regulator FINMA said in a statement on its website. Meanwhile, bank shareholders will receive 3 billion francs.
The bond was the biggest loss for the $275 billion AT1 market in Europe, surpassing the only other loss of this type of security: the €1.35 billion ($1.44 billion) loss suffered by junior bondholders of Spanish lender Banco Popular. SA returned in 2017, when it was used by Banco Santander SA for one euro to collapse. In that case, the equity is also disposed of.
In a typical writedown scenario, shareholders are the first to be hit before AT1 bonds suffer losses, as Credit Suisse also guided in its presentation to investors earlier this week. That’s why the decision to write off the bank’s riskiest debt – rather than its shareholders – prompted an angry response from some of Credit Suisse’s AT1 bondholders.
“It makes no sense,” said Patrik Kauffmann, portfolio manager at Aquila Asset Management AG. “This will be a total blow to the AT1 market. You can quote me on that.”
Kauffmann believes that money should be passed on to AT1 holders, leaving nothing for shareholders, because “seniority in the capital structure must be respected.”
AT1 bond holders
Pacific Investment Management Co., Invesco Ltd. and BlueBay Funds Management Co. SA is among many asset managers holding Credit Suisse AT1 notes, according to data compiled by Bloomberg. Ownership may change or be sold entirely since the last regulatory filing.
Pimco and BlueBay declined to comment when contacted by Bloomberg News on Friday, before the deal was announced. An Invesco spokeswoman said the investment team was continuing to monitor developments.
AT1 bonds were introduced in Europe after the global financial crisis to act as shock absorbers when banks began to fail. It is designed to impose permanent losses on bondholders or convert them into equity if the bank’s capital ratio falls below a predetermined level, effectively pushing up the balance sheet and allowing it to stay in business.
The price of the bond fluctuated sharply as traders gathered for a rare weekend session on Sunday to consider two scenarios: the regulator would nationalize part or all of the bank, possibly write off Credit Suisse’s AT1 bonds, or buy UBS with potentially no losses. bondholders.
Prices oscillated between 20 cents on the dollar to as high as 70 cents when the deal was done. After FINMA’s announcement, some trading desks only update clients if someone writes.
The broader market for risky European bank bonds, also known as contingent convertibles or CoCos, has also fallen over the past two weeks, with the AT1 average trading at around 80% of face value on Friday, one of the biggest discounts. in the notes.
hand grenade
For some investors, the reality of the UBS deal makes the notes worthless, given their well-known flaws.
AT1 owners know they’re buying high-yield risk with a hand grenade attached, according to John McClain, portfolio manager at Brandywine Global Investment Management.
“It is absolutely right to prevent moral hazard from creeping into the market segment,” he said. “The bond was made for moments like this. It’s like a disaster bond.”