Holders of Credit Suisse Group AG bonds suffered a historic loss in a takeover by UBS Group AG wiped out about 16 billion Swiss francs ($17.3 billion) worth of risky notes.
The deal will trigger a “complete reduction” of the bank’s additional Tier 1 bonds to increase the capital base, Swiss financial regulator FINMA said in a statement posted on its website. During this time, the bank’s shareholders should receive 3 billion francs.
The bond write-off is the biggest loss to date for the $275 billion European AT1 market, far eclipsing the only other write-down to date for such securities: a loss of €1.35 billion. ($1.44 billion) suffered by junior bondholders of Spanish lender Banco Popular SA in 2017, when it was absorbed by Santander bank SA for one euro to avoid a collapse. In this case, equity was also written off.
In a typical depreciation scenario, shareholders are hit first before AT1 bonds take losses, as Credit Suisse also guided in a presentation to investors earlier this week. That’s why the decision to write down the bank’s riskiest debt – rather than its shareholders – prompted a furious response from some Credit Suisse AT1 bondholders.
“It just doesn’t make sense,” said Patrik Kauffmann, portfolio manager at Aquila Asset Management AG. “It will be a blow to the AT1 market. You can quote me on that.
Kauffmann believes the money should have gone to AT1 holders instead, leaving nothing for shareholders, as “seniority in the capital structure must be respected”.
Pacific Investment Management Co., Invesco Ltd. and BlueBay Funds Management Co. SA were among several asset managers holding Credit Suisse AT1 notes, according to data compiled by Bloomberg. Their holdings may have changed or been entirely sold since their last regulatory filings.
Pimco and BlueBay declined to comment when contacted by Bloomberg. News Friday, before the announcement of the agreement. An Invesco spokeswoman said its investment teams continued to monitor developments.
AT1 bonds were introduced in Europe after the global financial crisis to act as shock absorbers when banks began to fail. They are designed to impose permanent losses on bondholders or be converted into equity if a bank’s capital ratios fall below a predetermined level, thereby strengthening its balance sheet and allowing it to remain in business.
The prices of these bonds have fluctuated wildly as traders gathered for a rare weekend session on Sunday to weigh two scenarios: either the regulator would nationalize part or all of the bank, possibly canceling Credit Suisse’s AT1 bonds entirely, or a takeover of UBS with potentially no loss to holders of bonds.
Prices hovered between 20 cents on the dollar and 70 cents as the deal was finalized. Following FINMA’s announcement, some trading desks simply informed their clients that a write-down had taken place.
The broader market for these risky European bank bonds, also known as contingent convertibles or CoCos, has also fallen over the past two weeks, with the average AT1 priced at around 80% of value. nominal Friday, one of the largest discounts. checked in.
For some investors, the fact that the UBS deal rendered the notes worthless came as no surprise, given their well-known drawbacks.
AT1 holders knew they were buying high-yield risk with a hand grenade attached, according to John McClain, portfolio manager at Brandywine Global Investment Management.
“It’s absolutely the right thing to do to prevent moral hazard from seeping into this part of the market,” he said. “These bonds were created for times like this. Similar to catastrophe bonds.