- Credit Suisse has written down its Additional Tier 1 (AT1) bonds to zero as part of its takeover by UBS.
- The Swiss regulator, FINMA, made the decision to write down the bonds as they fall under the too-big-to-fail framework.
- AT1 bonds are a riskier type of debt than traditional bonds and are designed to count towards banks' regulatory capital.
- AT1 bonds sit just above equity in the priority ladder for repayment in a bankruptcy process and are intended to be converted into shares when a lender's capital buffers are eroded beyond a certain threshold.
- Some bondholders are unhappy with the decision to write down the bonds to zero, particularly as it appears they will fare worse than shareholders in the deal.
Credit Suisse has announced that its Additional Tier 1 (AT1) bonds have been written down to zero as part of its takeover by UBS, causing anger among some bondholders who believed they would have been better protected in a rescue deal. The bonds, which have a notional value of 16 billion Swiss francs ($17.24 billion), are a riskier type of debt than traditional bonds and are designed to count towards banks' regulatory capital. AT1 bonds sit just above equity in the priority ladder for repayment in a bankruptcy process and are intended to be converted into shares when a lender's capital buffers are eroded beyond a certain threshold.
The decision to write down the bonds to zero was made by the Swiss regulator, FINMA, in line with the too-big-to-fail framework. FINMA President Marlene Amstad defended the decision, stating that the regulator had chosen to stick to the framework and trigger the bonds. This move is in line with the rules established in the wake of the global financial crisis to ensure that taxpayers are not on the hook for rescuing large banks.
However, some bondholders are unhappy with the decision, especially as it appears that they will fare worse than shareholders in the deal. Jerome Legras, head of research at Axiom Alternative Investments, an investor in Credit Suisse's AT1 debt, stated that it is "stunning and hard to understand how they can reverse the hierarchy between AT1 holders and shareholders."
The Credit Suisse case highlights the risks associated with investing in AT1 bonds. While they can offer higher yields than traditional bonds, they are also riskier and have the potential to be written down to zero or converted into shares. As a result, they are generally considered to be suitable only for sophisticated investors who understand the risks involved.
The move to write down the AT1 bonds to zero is likely to have wider implications for the bond market, particularly for other banks that have issued similar bonds. It will also be interesting to see whether this decision affects investor sentiment towards Credit Suisse and whether other investors will follow Axiom Alternative Investments in their decision to invest in Credit Suisse's AT1 debt.
