Downturn: A person walks in front of an electronic stock board showing indexes at a securities firm in Tokyo. Asian stock markets are down after Swiss authorities arranged the takeover of troubled Credit Suisse amid fears of a global banking crisis. — AP
ZURICH: Holders of Credit Suisse Group AG bonds suffer a historic loss as a takeover by Union Bank of Switzerland (UBS) Group AG wipes out about 16 billion Swiss francs (US$17.3bil or RM78bil) worth of risky notes.
The deal will trigger a “complete write-down” of the bank’s additional Tier-1 bonds in order to increase core capital, the Swiss Financial Market Supervisory Authority (Finma) said in a statement on its website. Meanwhile, the bank’s shareholders are set to receive three billion francs (RM15bil).
The bond wipe out is the biggest loss yet for Europe’s US$275bil (RM1.2 trillion) Additional Tier-1 (AT1) market, far eclipsing the only other write-down of this type of security to date – a €1.35bil (US$1.44bil or RM6.5bil)) loss suffered by junior bondholders of Spanish lender Banco Popular SA back in 2017, when it was absorbed by Banco Santander SA for one euro to avoid a collapse. In that instance, the equity was also written off.
In a typical write-down scenario, shareholders are the first to take a hit before AT1 bonds face losses, as Credit Suisse also guided in a presentation to investors earlier this week.
That’s why the decision to write down the bank’s riskiest debt – rather than that of its shareholders – provoked a furious response from Credit Suisse’s AT1 bondholders.
“This just makes no sense,” said Patrik Kauffmann, a portfolio manager at Aquila Asset Management AG.
“This will be a total blow to the AT1 market. You can quote me on that.”
Kauffmann believes that money should have gone to AT1 holders instead, leaving nothing for shareholders, as “seniority in the capital structure needs to be respected.”
Pacific Investment Management Co, Invesco Ltd and BlueBay Funds Management Co SA were among the many asset managers holding Credit Suisse AT1 notes, according to data compiled by Bloomberg.
Their holdings may have changed or been sold entirely since their last regulatory filing.
Pimco and BlueBay declined to comment when contacted by Bloomberg News, before the deal was announced.
A spokeswoman for Invesco said that its investment teams are continuing to monitor developments.
AT1 bonds were introduced in Europe after the global financial crisis to serve as shock absorbers when banks start to fail.
They are designed to impose permanent losses on bondholders or be converted into equity if a bank’s capital ratios fall below a predetermined level, effectively propping up its balance sheet and allowing it to stay in business.
Prices on those bonds fluctuated wildly as traders gathered for a rare weekend session on Sunday to weigh two scenarios – either the regulator would nationalise part or the whole bank, possibly writing off Credit Suisse’s AT1 bonds entirely, or a UBS buyout with potentially no losses for bondholders. — Bloomberg
