Credit Suisse bondholders were licking their wounds after the rescue deal by UBS resulted in US$17bn of the failed Swiss bank’s bonds being wiped out.
“In my eyes, this is against the law,” said Patrik Kauffman, a fund manager at Aquila Asset Management who invests in additional tier 1 (AT1) bank debt, quoted by the Financial Times.
He said it was “insane” that under the terms of UBS’s takeover of Credit Suisse, AT1 bondholders were set to receive nothing while shareholders would walk away with SFr3bn (US$3.2bn).
“We’ve never seen this before. I don’t think this would be allowed to happen again.”
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. The ATI market size is estimated to be around US$275bn in Europe.
The Swiss authorities’ decision to leave AT1 bondholders with nothing has turned upside down the long-established norms of debt investors being prioritised over equity holders in a debt recovery.
Some investors said reversing the market norms could herald a significant reduction in appetite for AT1s. “This could be the end of that market for the foreseeable future,” said Jim Leaviss, chief investment officer of public fixed income at M&G, quoted by the FT.
“Global investors won’t be interested for a while or at least until the yields adjust significantly higher, but at that point, the yields will likely be too high for banks to want to issue them as a cheaper source of funding than equities.”
The ECB questioned the Swiss authorities’ move, saying equity instruments “are the first ones to absorb losses” and only after that would AT1s need to be written down. “This approach has been consistently applied in past cases,” the ECB said, adding that AT1 debt remained “an important component of the capital structure of European banks”.
French insurer AXA stated it had a "limited exposure" of about €0.6 bn Credit Suisse but less than €20mln exposure to AT1s.
According to data on Bloomberg, Pacific Investment Management Co., Invesco Ltd (NYSE:IVZ) and BlueBay Funds Management Co. SA are among the many asset managers holding Credit Suisse AT1 notes, although these holdings may have changed or been sold entirely since their last regulatory filings.
One fund under pressure was the Invesco AT1 Capital Bond ETF, whose share price slumped nearly 9%. It tracks the performance of an index of AT1 bonds including some issued by Credit Agricole, Barclays, Lloyds and UBS.