Managers assess impact of Credit Suisse takeover on debt markets

Last week, Credit Suisse’s share price fell more than 30% amid negative effects in the banking sector after the collapse of US banks, including Silicon Valley Bank.

FINMA said it had been “tracking Credit Suisse intensively for several months” and that there was a risk that the bank would become illiquid due to significant customer churn. The authorities took action “to prevent serious damage to the Swiss and international financial market”, with the banking group being offered liquidity by the central bank and support from the Swiss government.

However, one part of the takeover involves Credit Suisse’s additional Tier 1 debt, known as AT1, part of the contingent convertible asset class, also known as CoCos. Securities are intended to support bank capital.

FINMA stated that “the emergency government support will result in a total write-off of the face value of all of AT1 Credit Suisse’s debt” totaling around CHF 16 billion.

While Credit Suisse said in a press release that the takeover deal was not expected to disrupt customer service, financial managers called the AT1 writedown a potentially long-term issue for European banks and credit markets.

Credit Suisse AT1 bonds are held by Pacific Investment Management Co., which holds $807 million in securities, and Invesco, which holds about $370 million in securities, according to Bloomberg. A PIMCO spokesman declined to comment. A spokesman for Invesco could not be contacted for comment.

In a note published Tuesday, the BlackRock Investment Institute said it maintained its risk-averse stance, but “ongoing banking unrest on both sides of the Atlantic” meant it remained flexible and undervalued most stocks, downgrading its credit rating to neutral due to for a tighter loan. offers to borrowers, and prefer very short-term government bonds for income.

The institute said the write-down of AT1 bonds to zero was an “unusual feature” of the deal, as the move was prompted by government support.

While these conditions are rare outside of Switzerland and unlikely to be found elsewhere, the BII warned that the cost of issuance would increase as a result of this situation.

TwentyFour Asset Management executives also see long-term implications for bank debt markets following Credit Suisse’s move.

In a blog post on Monday, Eoin Walsh, founding partner and portfolio manager of TwentyFour, said that AT1 bondholders are “destroyed, which is unprecedented.”

While acknowledging that the situation is highly volatile, Mr. Walsh said that “it is very difficult to say how much investor confidence will be damaged in the short term. However, we think it’s important to remember that this was a bank. , in a special regime facing large deposit outflows where we believe the regulator made a highly questionable decision that could end up in court – in some cases the bonds are now being offered with a “Demand Transfer Agreement” which suggests this option is open. “

The Credit Suisse situation should “serve as a warning of a potentially deeper crisis,” Eric Vanraes, portfolio manager at strategic bond fund Eric Sturdza Investments, said in written comments Tuesday.

Regarding the write-down of Credit Suisse AT1 bonds, Mr. Vanraes said investors “have found that their Credit Suisse AT1 bonds have been subservient to equities and are now worth nothing. This is unprecedented and discredits subordinated debt in banks and the asset class as a whole. In the short term, the AT1 market will suffer. In the medium term, it will undoubtedly provide opportunities for those professionals who can analyze this type of instrument and read the fine print of prospectuses.”

However, David Serra, founder and CEO of Algebris Investments, said in an emailed comment on Monday that the firm does not expect “long-term structural impact on AT1 in Europe, outside of Switzerland. These are the G20 capital structures that exist around the world. These loss-absorbing bonds are part of the bank debt structure and will remain so in Europe and the US under Basel III.”