The $ 275 billion bank-convertible bond market is in turmoil after the Credit Suisse Bank’s securities are wiped out after the UBS takeover.
As per the deal on Sunday, Credit Suisse will be taken over by UBS for $ 3.2 billion. CNBC news reported that one section of the Credit Suisse Banks’s bondholders is set to be wiped out. Consequently, the bank’s 16 billion francs (almost $17.2 billion) of additional tier 1 bonds, contingent convertible bonds, or CoCos shall be written down to zero as part of its merger with UBS. As a result, the write-down has now worried investors of the dollar 275 billion AT1 bond market.
The development sparked concerns about how this can impact the global credit markets. It will also impact AT1 or additional tier 1 bonds from other big financial institutions. The Swiss National Bank said it would support the Credit Suisse Bank with up to 50 billion francs ($54 billion). Still, investors remain concerned, and the situation became untenable.
Similarly, MarketWatch reports that the value of a class of convertible bonds that banks issued went down on Monday. This was after the Credit Suisse Bank’s securities were written down to zero by the Swiss regulator.
The move now angered several Credit Suisse AT1 bondholders. This is because their investments are seemingly lost. But, shareholders shall receive payouts after the takeover. In general, equity investments are to be classed secondary to AT1 bonds.
Therefore, the credit strategists of Goldman Sachs’ said that the decision could effectively subordinate AT1 bondholders to shareholders.
Plus, it equally represents the largest loss ever inflicted on AT1 investors since the time of the birth of the asset class after the global financial crisis.
Goldman Sachs pointed out that FINMA’s decision weakens the case by adding risk. The firm’s strategists said that it has now become hard to assess the attractiveness of the present historically large spread pick-up that is provided by AT1 bonds versus their HY or the high-yield corporate counterparts.
Goldman Sachs explained that the recent developments might reduce the appetite for additional tier 1 bonds.
What Elisabeth Rudman commented
The global head of financial institutions at DBRS Morningstar, Elisabeth Rudman, told CNBC’s Squawk Box Europe on Monday that FINMA’s steps should not be a shock. This is because AT1 bonds are present to absorb losses.
Rudman further said it might impact the investors’ views of the bonds and how much they shall pay. She said that she does not think it is a risk that they will be written down. But, risks can be attached to the pricing and how investors reassess the yield they seek.
MarketWatch reported that the “Invesco AT1 Capital Bond UCITS” exchange-traded fund sank about 16 percent on Monday.
The chief financial economist in Europe at Jefferies, Mohit Kumar, said that the UBS-CS deal may have avoided an immediate risk, but the AT1 write-down has added uncertainty that could stay for weeks if not months.