Credit Suisse AT1 Bondholders See 16 Billion Swiss Francs Wiped Out in UBS Takeover

Swiss Regulator FINMA Writes Additional Tier-One Bonds to Zero

Credit Suisse’s additional tier-one (AT1) bondholders are set to lose all their investments in the bank’s takeover by UBS, as the Swiss regulator FINMA announced that the bonds would be written down to zero. This move has angered AT1 bondholders as their investments have seemingly been lost while shareholders will receive payouts. FINMA’s decision represents the largest loss ever inflicted on AT1 investors since the global financial crisis.

AT1s Created to Absorb Losses with Elevated Risk Factor

AT1 bonds, also known as contingent convertibles, are a type of debt that is considered part of a bank’s regulatory capital. Holders can convert them into equity or write them down in certain situations. Due to their elevated risk factor, they often have higher yields than other bonds. AT1s were created in the aftermath of the financial crisis as a way of shifting risks away from taxpayers during a crisis.

Deal Worth $3.2 Billion Agreed with Swiss Regulator Assistance

Credit Suisse’s takeover by rival Swiss bank UBS was agreed to on Sunday with the help of Swiss authorities. Credit Suisse has struggled for years, and had been dealt another blow after its biggest investor, Saudi National Bank, said it could not offer any more support to the bank financially due to regulatory restrictions. Investor concerns remained, leading to the Swiss National Bank supporting Credit Suisse with up to 50 billion francs ($54 billion).

Impact on Global Credit Markets and AT1 Bonds

Elisabeth Rudman, global head of financial institutions at DBRS Morningstar, stated that FINMA’s move should not come as a shock, as AT1s are there to absorb losses. However, Rudman acknowledged that investors may reassess the yield they are looking for, as it may impact their views of AT1 bonds and how much they are willing to pay for them. Meanwhile, Goldman Sachs notes that FINMA’s decision “greatly weakens the case to add risk.”

EU Banking Regulators Indicate Different Approach in Similar Situations

Banking regulators in the European Union, which Switzerland is not a part of, stated on Monday that they would follow a different approach if similar situations arose within their remit. Common equity instruments are the first ones to absorb losses, and only after their full use would AT1s be required to be written down. This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions. The statement may ease investor concerns slightly.

Vítor Constâncio Criticises FINMA’s Decision

Vítor Constâncio, former vice president of the ECB, commented on FINMA’s announcement on Twitter, saying it was a mistake that could lead to legal action. The Bank of England also distanced itself from FINMA’s decision, stating that the UK has a clear statutory order detailing which shareholders and creditors were expected to take on losses. AT1 bonds rank ahead of equity investments and the unwinding of SVB UK followed this process.

Credit: https://www.cnbc.com/2023/03/20/17-billion-of-credit-suisse-bonds-worthless-following-ubs-takeover.html

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