Some US$17bil (RM76.1bil) worth of AT1 Credit Suisse bonds will be written down to zero on the orders of the Swiss regulator as part of a rescue merger with UBS. — Reuters
NEW YORK: The decision by Swiss authorities to wipe out Credit Suisse’s Additional Tier-1 (AT1) bonds could reduce demand for this type of bond in the long term, a Goldman Sachs strategist says, but the risk of contagion across credit markets is limited due to the relative niche nature of the asset class.
Some US$17bil (RM76.1bil) worth of AT1 Credit Suisse bonds will be written down to zero on the orders of the Swiss regulator as part of a rescue merger with UBS.
Under the deal, holders of Credit Suisse AT1 bonds will get nothing, while shareholders, who usually rank below bondholders in terms of who gets paid when a bank or company collapses, will receive US$3.23bil (RM14.5bil).
AT1 bonds issued by other European banks fell sharply on Monday as the treatment of Credit Suisse AT1 bondholders highlighted the risks of investing in this type of debt.
The sell-off was a “knee-jerk reaction to an outcome that took a lot of people by surprise,” Lotfi Karoui, chief credit strategist at Goldman Sachs, told Reuters.
But he added: “In the long term, we are a little concerned about the potential permanent destruction of demand. I do think that investors will have to re-assess how the risk-reward looks in those instruments, particularly at times of rising financial distress.”
AT1 bonds act as shock absorbers if a bank’s capital levels fall below a certain threshold. They can be converted into equity or written off.
European regulators tried to stop the AT1 market rout on Monday and said owners of this type of debt would only suffer losses after shareholders have been wiped out, unlike what happened at Credit Suisse.
Meanwhile, law firm Quinn Emanuel Urquhart and Sullivan said it was talking to a number of Credit Suisse AT1 holders about possible legal action.
Karoui said AT1 bonds, excluding the Credit Suisse ones, totalled about US$100bil (RM447.7bil) in the dollar market and just over 70 billion (RM335.9bil) in the euro market, compared to over US$10 trillion (RM44.8 trillion) of investment-grade bonds between the United States and Europe.
“I would view it as a small, niche asset class. I don’t think there’s overlap between the two investor bases,” he said. — Reuters
