Credit Suisse's $170 billion AT1 bond value was cleared to zero, causing anger among bondholders

The Paper reporter Wang Huirong

Credit Suisse's risky bond AT170, totaling about $1 billion, has zeroed in value, sparking anger among bondholders.

On the evening of March 3, local time, with the help of the Swiss government, UBS acquired Credit Suisse, which is in crisis, for a total consideration of 19 billion Swiss francs (about 30.32 billion US dollars).

According to a press release issued on UBS's official website, 22.48 Credit Suisse shares held by Credit Suisse shareholders will be exchanged for 1 UBS share, equivalent to 0.76 Swiss francs per share.

On the same day, Credit Suisse issued a press release on its official website, saying that on the same day, Credit Suisse was notified by the Swiss Financial Market Supervisory Authority (Finma) that Finma had determined that Credit Suisse's additional Tier 160 Capital bonds with a total notional amount of about 172 billion Swiss francs (about 4.1 billion US dollars) would be written down to zero.

A number of foreign media reported that as part of the rescue merger between Credit Suisse and UBS, the impairment of AT1 bonds was zero, which angered AT1 bondholders. Fema chairman Marlene Amstad said Finma had stuck to the country's "too-big-to-fail" banking framework in making its decision. Finma also said the decision would strengthen UBS's capital. That means AT1 bondholders will likely have nothing, while shareholders (who typically have a lower priority for repayment of shares than bonds in bankruptcy proceedings) will receive about $32.3 billion under UBS's agreement.

AT1 bonds, designed under the European regulatory framework following the global financial crisis, are a subordinated debt that can be included in the regulatory capital of banks. In addition to holding more common equity, big banks are forced to issue contingent convertible bonds (Cocos). The most common form of these Cocos bonds is known as AT1 and is designed as a way to transfer risk to investors and away from taxpayers if banks are in trouble. When the capital buffers of lenders (i.e., creditors) are eroded beyond a certain threshold, these bonds can be converted into equity or written down.

Credit Suisse has issued a large number of AT10 bonds over the past 1 years. At the end of 2022, Credit Suisse had a balance of CHF 1.147 billion in AT<> bonds.

Jerome Legras, head of research at Axiom Alternative Investments, one of the investors in Credit Suisse's AT1 bonds, said: "This is shocking and puzzling how they are reversing the hierarchical relationship between AT1 bondholders and shareholders. UBS CEO Ralph Hamers told analysts that the decision to write down AT1 bonds to zero was made by Finma and therefore would not create liabilities for UBS.

Reuters had earlier reported that Swiss authorities were considering imposing losses on bondholders as part of a merger bailout deal.

The Financial Times reported that Finma's move has a clear legal basis, so some of Credit Suisse's regulatory capital can be written off (i.e. private creditors will share the exposure of AT1 bonds) to ensure that the crisis in Credit Suisse is resolved outside of state measures. Swiss regulators have reviewed the instruments and believe they have the legal backing to evaporate the value of AT1 bonds, with the standard threshold of common equity tier 7 capital adequacy ratios below <>%, but usually at the discretion of national regulators when a bank is deemed "unviable".

Credit Suisse's AT1 bonds rose early on March 3 local time on reports that Credit Suisse's shareholders would reap some benefits in the deal with UBS, raising hopes that bondholders would be protected.

Today, Credit Suisse's AT1 bonds have been written down to zero, dashing the hopes of the bondholders. Foreign media reported that some investors said that the move by Swiss regulators may make it more difficult for other banks to issue new AT1 bonds.

Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors, said, "This will make AT1 bonds more expensive for all other banks in the future because everyone is seeing this additional risk right now." ”