Analysis-Credit Suisse rescue presents ‘buyer beware’ moment for bank bondholders

By Tom Westbrook

The rushed deal to rescue Swiss lender Credit Suisse Group AG was a rude shock for holders of the bank’s riskiest tranche of bonds. These investors are the only ones not receiving any compensation, and the convention of giving bondholders priority over shareholders in debt recovery has been reversed. Analysts have commented that banks were already paying significantly more this year than in the past for such hybrid capital, and it will be challenging to find investors willing to take the risk in the future. The Swiss authorities brokering Credit Suisse’s rescue merger with UBS have confirmed that 16 billion Swiss francs ($17 billion) of Additional Tier 1 (AT1) debt will be written down to zero.

AT1 bondholders rank below those holding equity stakes in Credit Suisse, who will receive 0.76 Swiss francs per share. The revelation rattled the Asian markets, causing bank credit default swaps to widen and stocks to fall. European bank shares and bonds also experienced a decline as traders re-priced the risk and cost of banks’ capital. “With the restructuring of Credit Suisse, no one had really thought about how it would affect the AT1, and that was a fat-tail risk,” commented Sean Darby, global equities strategist at Jefferies in Hong Kong.

The HSBC Holding’s 8% US dollar perpetual bond issued on March 7 traded at 90 cents to the dollar, a wealth manager noted. Asian AT1 bonds fell four to five points, while European ones dropped 10 points, according to reports. A $1 billion Credit Suisse AT1 bond with a 4.5% coupon was bid as low as one cent on the dollar, Tradeweb pricing indicated. With the AT1s leading the way, a London-listed exchange-traded fund that tracks banks’ AT1 debt dived 15.7%.

AT1 bonds, a form of junior or hybrid debt that counts towards banks’ regulatory capital, were created in the aftermath of the global financial crisis. They were designed to provide a bail-in or a way for banks to transfer risks to investors and away from taxpayers if they got into trouble. AT1 bonds carry a higher coupon and can be converted into equity or written down when a lender’s capital buffers erode beyond a particular threshold. AT1 write-downs have taken place in several countries, including Spain, Greece, Austria, and Denmark.

Deutsche Bank analysts said that “we think this is quite negative for AT1 and broader TLAC securities worldwide as it highlighted the inherent risks present in these instruments.”