London () — Investors in a riskier class of Credit Suisse bonds saw the value of their shares reduced to zero on Sunday, after Swiss authorities negotiated an emergency takeover of the bank by rival UBS.
On Sunday, the Swiss National Bank (SNB) announced that UBS would buy Credit Suisse for 3 billion Swiss francs ($3.25 billion), or about 60% less than the bank was worth when the Markets closed this Friday. Credit Suisse shareholders will largely disappear, receiving the equivalent of just 0.76 Swiss francs worth of UBS shares for shares worth 1.86 Swiss francs on Friday.
But it is the owners of Credit Suisse’s $17 billion “additional tier one,” or AT1, bonds who are left out entirely. Swiss authorities said bond investors would receive absolutely nothing. The decision departs from the usual hierarchy of losses when a bank fails, and shareholders are often last in line for any kind of payout.
“The extraordinary support from the government will cause a total reduction in the par value of all Credit Suisse AT1 shares in the amount of around 16 billion [de francos suizos]”, the Swiss Financial Market Supervisory Authority said in a statement on Sunday.
David Benamou, chief investment officer at Axiom Alternative Investments, a French wealth management firm with exposure to AT1 bonds, called the decision “quite surprising, not to say…shocking.”
The European market for such bonds is worth about $250 billion, according to Financial Times. Now he could freeze deep.
What are AT1 bonds?
AT1 bonds are also known as “contingent convertibles” or “CoCos.” They were created in the aftermath of the 2008 financial crisis as a way for banks that failed to absorb losses, making a taxpayer-funded bailout less likely.
They’re a long shot: If a lender gets into trouble, these kinds of bonds can be quickly converted to equity or written off entirely.
Because they are riskier, AT1s offer a higher yield than most other bonds issued by borrowers with similar credit ratings, making them popular with institutional investors.
What is the controversy?
It’s not the redemption of Credit Suisse’s AT1 bonds that has rattled investors, but the fact that the bank’s shareholders will get some compensation when bondholders won’t.
Bondholders are typically higher in the pecking order than shareholders when a bank fails. But because Credit Suisse’s demise didn’t follow a traditional bankruptcy, analysts told , the same rules don’t apply.
“The claims hierarchy is still applicable in the EU… there is no way shareholders get paid and AT1 holders get paid zero,” Benamou said. “The decision taken by the Swiss authorities is really very strange.”
Michael Hewson, chief market analyst at CMC Markets, told : “It appears that in this case, because it was not a bankruptcy situation, it was felt that both AT1 bondholders and shareholders would feel the pain.” .
EU banking regulators and the Bank of England acted on Monday to reassure AT1 investors that they would have priority over shareholders in the event of future banking crises.
“Common Equity Instruments [acciones] they are loss-absorbing first, and only after full use would additional tier one write-down be required,” EU regulators said in a statement. “This approach has been applied consistently in previous cases.”
Christine Lagarde, president of the European Central Bank, said in a speech Monday that eurozone banks had “very limited exposure” to Credit Suisse, particularly in relation to AT1 bonds.
“We are not talking about billions, we are talking about millions,” he said.
The Bank of England said that “holders of [AT1] should expect to be exposed to loss” when a bank fails according to its usual classification in the capital hierarchy.
What happens now with investors?
The legal basis for Credit Suisse’s losses can be challenged. Quinn Emanuel Urquhart & Sullivan, a Los Angeles-based litigation firm, said Monday that he had assembled a team of lawyers who were discussing options with Credit Suisse AT1 bondholders.
The SNB’s surprise move has rocked Europe’s AT1 bond market, with investors now wondering if their holdings could be wiped out if another bank fails.
Joost de Graaf, co-head of European credit at Van Lanschot Kempen, a Dutch wealth management firm, told his fund did not invest in AT1 because it was “afraid [de] something like this”, where regulators could decide that a bank was no longer viable and write down the value of the bonds.
“Over the next few years, the market [AT1] It will probably go into a kind of hibernation, where the new AT1s will be very difficult for emitters to get to acceptable levels,” de Graaf said.
The impact will likely spill over to the broader bond market, he added, with investors demanding higher yields for bonds now seen as riskier.
For the foreseeable future, funding [de los bancos] [a través de bonos] it will be more expensive,” de Graaf said.
There are signs that change may already be happening.
Invesco’s AT1 Capital Bond ETF, which tracks AT1 debt, is currently trading down 5.5% compared to last Friday’s close. WisdomTree, another AT1 ETF listed on the London Stock Exchange, fell 7.4% in afternoon trading.
But the real damage is the precedent that the writedown may have set, said Benamou of Axiom Alternative Investments.
“No financial analyst had ever believed that AT1 bonds would be reduced to zero… given Credit Suisse’s solvency level… [y] a fairly high level of regulatory capital,” he said.
— Mark Thompson contributed reporting
