Credit Suisse’s riskiest bonds lost profits on talk of nationalization

(Bloomberg) —

Most read by Bloomberg

Credit Suisse Group AG’s riskiest bonds cut gains on Sunday on fears Swiss authorities may need to nationalize the bank if the deal with UBS Group AG falls through. If this happens, the bonds will most likely be destroyed as part of the rescue plan.

The bonds, including the riskiest part of the capital, additional Tier 1 bonds, were trading at 30 to 50 cents on the dollar, about 20 cents less than about an hour earlier, people familiar with the matter said. in this matter, asking not to be named because OTC price quotes are private. They are still higher than their close on Friday, when prices hovered in the 20-30 range.

It’s a quick turn in the narrative, which turned positive on Sunday amid optimism that a UBS offer of up to $1 billion would avoid a scenario in which bondholders suffer punitive losses on some of Credit Suisse’s riskiest bonds.

The securities, introduced in the wake of the global financial crisis, are designed to help banks build capital to meet rules designed to prevent bankruptcy. They can be written off if the bank’s capital falls below a certain level. In the case of Credit Suisse, its total Tier 1 capital must be below 7% of its risk-weighted assets.

Currently, the Swiss authorities are considering the possibility of either a complete acquisition of the bank, or a significant stake in its capital, if the takeover of UBS does not take place, although nothing has been agreed. Reuters reported on Sunday afternoon that Swiss authorities are considering imposing losses on bondholders as part of a bailout plan.

Several banks, including Goldman Sachs, Morgan Stanley and Jefferies Financial Group, did not close their Credit Suisse bond sales and trading departments over the weekend, which rarely happens except during times of stress.