Following the acquisition of Credit Suisse, which had been exposed to financial uncertainty, financial professionals around the world were shocked by the announcement made by the Swiss financial authority on March 3. It was an unusual response in which more than 19 trillion yen of special corporate bonds called "AT1 bonds" became worthless in an instant. Why were huge corporate bonds deemed worthless? We interviewed them to find out what kind of impact it will have on Japan. (Economic Affairs Department reporter, Kentaro Makata)

Shocking the world: "AT1 bonds" become worthless

Credit Suisse was rescued by the Swiss financial authority in the form of an acquisition by UBS, the same Swiss financial giant, and along with this, FINMA = Swiss Financial Market Supervisory Authority issued the following statement.

"With the Swiss government's special support, the value of all Credit Suisse's AT160 bonds, which amount to 2 billion Swiss francs (2000.1 trillion yen in Japan yen), will be completely depreciated, thereby increasing the core capital."

AT1 bonds = Additional Tier 1 bonds are special corporate bonds issued by financial institutions.

With the formulation of the new international regulation "Basel 2008" to prevent the global financial crisis based on the lessons learned from the Lehman shock in 3, it has come to be recognized as a basic item of equity capital called "Other Tier 1".

While AT1 bonds have higher interest rates than regular corporate bonds and subordinated bonds, there is a risk that the principal amount will be reduced or forcibly converted into shares when equity capital decreases.

In other words, investors who bought these bonds absorb the losses so that depositors are not affected.

In the case of Credit Suisse, there were two triggers when the AT1 bond became worthless.

When the capital to absorb losses, such as stocks, falls below a certain level.

If the Swiss authorities consider the bank to be at risk of failure or provide exceptional government assistance.

If any of these two conditions were violated, it would be worthless.

The Swiss Ministry of Finance announced that the government would provide UBS with a government guarantee of CHF 2 billion in Japan yen and more than 2.90 trillion yen in Japan yen if the value of the assets that UBS takes over from Credit Suisse declines and future losses exceed a certain amount.

This support package falls under the second trigger, "exceptional government support", and Credit Suisse's "AT1 bond" is believed to have been rendered worthless.

Why are only "AT1 bonds" worthless?

There is also a view that since it received government support, it is inevitable that investors in "AT1 bonds" will suffer losses under the contract.

However, many investors have questioned this response, and some have considered litigation.

Nobuya Kira, a lawyer who has been seconded to the Financial Services Agency and is familiar with international regulations of financial institutions, points out that the reason for this is that the order of investors' reimbursement has been disturbed.

What does ranking mean?

In general, the repayment order of bonds such as corporate bonds is considered to be higher than that of stocks.

Deposits are even more protected, and in the financial industry, the lower the order of repayment for the items represented in the figure below, the lower the ranking.

In general, AT1 bonds are paid off preferentially over common stock.

This time, however, Credit Suisse's common shares will be exchanged for UBS common shares, albeit well below their most recent valuation, and shareholders will receive some bailouts.

On the other hand, "AT1 bonds", which were considered to be higher in the ranking, will be worthless, and shareholders will be given preferential treatment over bondholders.

For this reason, investors who hold "AT1 bonds" are saying that it is strange that they alone suffer losses before investors who hold common stock.

In response, the Swiss Financial Market Supervisory Authority explained on March 3 that it had implemented the agreement because the terms of the contract had been satisfied, and once again asserted the legitimacy of this response.

Meanwhile, the EU banking authority, the European Central Bank, the central bank of the United Kingdom, and the Bank of England issued a statement to the effect that "holders of AT23 bonds only incur losses after asking shareholders to bear the losses," emphasizing that the worthlessness of Credit Suisse's AT1 bonds is an exceptional measure unique to Switzerland.

In the past, "AT1 bonds" became worthless in Spanish banks, but at the same time, common stocks also became worthless.

According to Kira, it is theoretically possible that AT1 bonds lose their value before common stocks, and points out that "this is the first case where the rankings have been changed."

Nobuya Kira, Nagashima
, Ohno & Tsunematsu Law Office, said, "Despite the fact that the documents of Credit Suisse's contracts state that the rankings may be swapped, many investors may have thought that when 'AT1 bonds' become worthless, common stocks will also be worthless. Based on the fact that the risk of incurring losses before investors in the shares is clearly stated in the contract document, the existence and extent of the risk may be a point of contention."

What is the impact on Japan?

In this way, Credit Suisse's "AT1 bonds" have become worthless, and there has been widespread turmoil among investors, such as moves to let go of "AT1 bonds", and confusion has occurred in which their yields have risen.

Will it affect Japan?

According to the Financial Services Agency, there have been no reports of large amounts of Credit Suisse's AT1 bonds held by domestic financial institutions.

In addition, some investment trusts handled by domestic asset management companies incorporate AT1 bonds, but in all of them, the holding ratio is less than 1%.

On the other hand, some have pointed out the impact on financial institutions issuing AT1 bonds.

In Japan, three megabanks have issued a total of more than 3 trillion yen of AT3 bonds under the name of "perpetual subordinated bonds," and many analysts believe that the cost of issuing AT1 bonds, that is, the cost of raising funds, will increase in Japan in the future.

Fourteen and a half years have passed since the collapse of Lehman Brothers, but how did the financial regulations introduced to prevent a recurrence of the financial crisis work, and where were the challenges?

While covering the unusual response and impact of the AT1 bonds, I felt that it was necessary to reexamine them.


Next week, the "PCE Deflator" index, which shows the trend of consumption in the United States, will be released on the 31st.

Despite a series of bank failures in the United States, the Fed decided this week to continue raising rates in favor of controlling inflation.

It will be interesting to see how long inflation continues.

Financial market developments also remain closely watched as concerns about the financial system continue to smolder in the wake of the failure of a U.S. bank and the acquisition of Credit Suisse.