Credit Suisse’s $17 Billion Risky Bonds Are Now Worthless

(Bloomberg) —

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Bondholders of Credit Suisse Group AG suffered a historic loss when the UBS Group AG takeover wiped out about CHF16 billion ($17.3 billion) in risky bonds.

The deal will result in a “full write-down” of the bank’s additional Tier 1 bonds in order to increase its core capital, Swiss financial regulator FINMA said in a statement on its website. Meanwhile, the bank’s shareholders should receive 3 billion francs.

UBS buys Credit Suisse in historic deal to end crisis

The disappearance of the bonds is the biggest loss for the $275 billion European AT1 market, far surpassing the only other write-down to date of this type of security: a loss of €1.35 billion ($1.44 billion) suffered by junior bondholders of the Spanish lender Banco Popular. SA back in 2017 when it was taken over by Banco Santander SA for one euro to avoid collapse. In this case, capital was also written off.

In a typical equity write-off scenario, shareholders are the first to suffer before AT1s hit losses, as Credit Suisse also guided in an investor presentation earlier this week. That’s why the decision to write off the bank’s riskiest debt, rather than its shareholders, provoked a furious reaction from some AT1 Credit Suisse bondholders.

“It just doesn’t make sense,” said Patrick Kaufmann, portfolio manager at Aquila Asset Management AG. “This will be a complete blow to the AT1 market. You can quote me on this.”

Kaufmann believes the money should have gone to AT1 holders instead, leaving nothing to shareholders, as “seniority in the capital structure needs to be respected.”

AT1 bondholders

According to data compiled by Bloomberg, Pacific Investment Management Co., Invesco Ltd. and BlueBay Funds Management Co. SA were among the many asset managers holding Credit Suisse AT1 bonds. Their assets may have been changed or completely sold since their last registration with the regulators.

Pimco and BlueBay declined to comment when Bloomberg News contacted them on Friday, before the deal was announced. A spokesperson for Invesco said its investment teams continue to monitor developments.

AT1 bonds were introduced in Europe after the global financial crisis to act as shock absorbers when banks start to collapse. They are designed to impose permanent losses on bondholders or convert to equity if a bank’s capital ratio falls below a predetermined level, effectively maintaining its balance sheet and allowing it to remain in business.

Prices for these bonds fluctuated wildly as traders gathered for a rare weekend session on Sunday to weigh two scenarios: either the regulator nationalizes some or all of the bank, possibly writing off Credit Suisse’s AT1 bonds entirely, or a UBS buyout potentially without loss to bondholders. .

Prices ranged from 20 cents on the dollar to 70 cents when the deal was completed. After the FINMA announcement, some sales departments simply informed their customers that a write-off had occurred.

Credit Suisse investors see $82 billion bond bailout risk

The broader market for these risky European bank bonds, also known as notional convertible bonds or CoCos, has also fallen over the past two weeks, with the average AT1 listed at about 80% of face value on Friday, one of the steepest discounts. on the record.

hand grenades

For some investors, the fact that the UBS deal devalued the bonds came as no surprise, given their well-known shortcomings.

According to John McClain, a portfolio manager at Brandywine Global Investment Management, AT1 owners knew they were buying high-yielding stocks with a hand grenade attached to them.

“This is absolutely the right decision to prevent moral hazard from penetrating this part of the market,” he said. “These bonds were made for moments like this. Like catastrophe bonds.

(Sunday trading updates in the seventh and eighth paragraphs.)

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