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Credit Suisse Group AG’s riskiest bond reduced its advances on Sunday due to concerns that Swiss authorities may be required to nationalize the bank if the deal with UBS Group AG fails. If this happens, the bonds will be liquidated as part of the rescue plan.
Bonds, including additional Tier 1 notes, the riskiest parts of Capital’s stack, according to people in the know, were quoted at prices ranging from the high 30s to mid-50 cents on the dollar, down about 20 cents from about an hour ago. Asking not to be published because price quotes in the over-the-counter market are private. They are still higher than their close on Friday, when prices hovered around the 20s and 30s.
It’s a sharp change in narrative, which turned positive on Sunday on optimism that a bid by UBS for up to $1 billion would avoid a scenario in which bondholders suffered punitive losses on some of Credit Suisse’s riskier bonds.
The securities, introduced after the global financial crisis, are designed to help banks shore up capital to meet regulations designed to prevent failure. If a bank’s capital level falls below a specified level, they can be written off. In the case of Credit Suisse its common equity Tier 1 would need to fall below 7% of its risk-weighted assets.
Swiss authorities are now considering either taking over the bank outright or retaining a significant equity stake should the UBS takeover fail, although nothing has been agreed. Reuters reported on Sunday afternoon that Swiss authorities are investigating the imposition of damages on bondholders as part of the rescue plan.
Several banks, including Goldman Sachs, Morgan Stanley and Jefferies Financial Group, have kept their bond sales and trading desks open for Credit Suisse bonds through the weekend, a rare occurrence except in times of stress.
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