Acquisition of Credit Suisse by UBS will hurt holders of US$ 17 billion in bonds – 03/19/2023 – Market

Holders of $17 billion in Credit Suisse bonds will have their investments wiped out after the Swiss bank’s acquisition by rival UBS, in a surprise move likely to cause an uproar when European debt markets open on Monday.

The measure occurs as part of the historic agreement between the banks. Swiss financial regulator Finma has ordered CHF16 billion of Credit Suisse’s additional Tier One (AT1) bonds, a relatively risky class of bank debt, to be reduced to zero.

Credit Suisse said it was informed of the decision by the regulator as it discussed the final details of its 3 billion Swiss franc ($3.25 billion) acquisition by UBS, announced late on Sunday (19) after several days of intense negotiations.

“The extraordinary government support will trigger a complete write-down of the par value of all AT1 shares of Credit Suisse worth around CHF 16 billion and therefore an increase in principal capital,” the regulator said.

However, several people involved in negotiating the deal said that ending AT1 holders — a move that appeared to surprise markets — would have wider repercussions and likely lead to the liquidation of other bank debts.

Traders quoting Credit Suisse AT1 bond prices on Sunday afternoon significantly increased their values ​​after the Financial Times reported that the UBS acquisition had been confirmed, on the expectation that the merger would not result in losses for bondholders.

“What Finma has done by breaking the capital structure will have a long-term consequence for any Swiss financial debt,” said a Credit Suisse AT1 bondholder.

One banker said the decision could lead to a “nightmare” in European debt markets, especially as bondholders are having heavier losses imposed on them than Credit Suisse shareholders.

While AT1s are typically owned by professional investors and hedge funds, they are also popular with retail and wealth management investors in Asia.

AT1s were introduced as part of the 2008 post-crisis regulatory reforms, which prompted banks to increase their capital levels. AT1s are a form of contingent convertible bond, which can be converted into equity if the bank gets into trouble.

If a bank’s equity ratio falls below a predefined threshold, AT1 investors can either lose their initial investment or have it converted to equity. As the riskiest form of bank debt in Europe, AT1s typically offer higher yields than safer bonds.

The Credit Suisse deal echoes the acquisition of Spanish lender Banco Popular in 2017, where the bank’s AT1 bonds were wiped out in the first example of the value of the hybrid asset class collapsing in the rescue of a European bank.

The takeover by Santander was orchestrated by the European Central Bank’s supervisory unit, the Single Resolution Body, after the ECB deemed the bank “failing or at risk of failing”.