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Holders of Credit Suisse Group AG bonds suffered a historic loss when a takeover by UBS Group AG wiped out about 16 billion Swiss francs ($17.3 billion) in riskier notes.
Swiss financial regulator FINMA said in a statement on its website that the deal would trigger a “complete write-down” of the bank’s additional Tier 1 bonds to raise core capital. Meanwhile, the bank’s shareholders are to receive 3 billion francs.
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The bond wipeout is the biggest ever loss for Europe’s $275 billion AT1 market, eclipsing the only other write-down to date of this type of security: a €1.35 billion ($1.44 billion) loss at Spanish lender Banco Popular’s junior bondholders SA came back in 2017, when it was absorbed into one euro by Banco Santander SA to avoid collapse. In that instance, equity was also written off.
In a typical writedown scenario, shareholders take the first hit before AT1 bonds suffer losses, as Credit Suisse also guided in a presentation to investors earlier this week. That’s why the decision to write off the riskiest loans – rather than the bank’s shareholders – provoked a furious reaction from some of Credit Suisse’s AT1 bondholders.
“It doesn’t make sense,” said Patrick Kaufmann, portfolio manager at Aquila Asset Management AG. “It would be a total blow to the AT1 market. You can quote me on that.”
Kaufman believes the money should have gone to AT1 holders, leaving nothing for shareholders, because “seniority in the capital structure should be respected.”
Pacific Investment Management Co., Invesco Ltd. and Bluebay Funds Management Co. SA were among several asset managers holding Credit Suisse AT1 notes, according to data compiled by Bloomberg. His holdings have changed hands or been sold entirely since his last regulatory filing.
Pimco and Bluebay declined to comment when contacted by Bloomberg News on Friday before the deal was announced. A spokeswoman for Invesco said its investment teams are monitoring the development.
AT1 bonds were introduced after the global financial crisis in Europe, acting as a shock absorber when banks began to fail. Designed to impose permanent losses on bondholders or convert to equity if a bank’s capital ratio falls below a predetermined level, effectively increasing its balance sheet and allowing it to stay in business.
The prices of those bonds fluctuated wildly as traders gathered for a rare weekend session on Sunday to weigh two scenarios: Either the regulator will partially or fully nationalize the bank, possibly taking over Credit Suisse’s AT1 bonds entirely. , or potentially a UBS buyout without loss. Bondholder.
Prices ranged between 20 cents to a high of 70 cents on the dollar when the deal was finalized. Following FINMA’s announcement, some trading desks directly updated their clients that a write-down had occurred.
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The broader market for those riskier European bank bonds, also known as contingent convertibles or cocos, has also fallen over the past two weeks, with the average AT1 indicated on Friday at a price of around 80% of face value. Which is one of the biggest discounts. On the record.
For some investors, the fact that the UBS deal rendered the notes worthless came as no surprise given their well-known downsides.
According to John McClain, portfolio manager at Brandywine Global Investment Management, holders of AT1 knew they were buying high-yield risk with a hand grenade attached to it.
“It’s absolutely the right thing to do to prevent moral hazard from growing in that part of the market,” he said. “Those bonds were made for moments like these. Like a bond of destruction.
(Updates with Sunday business in seventh and eighth paragraphs.)
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