Holders of $17 billion in Credit Suisse bonds will see their investment wiped out after UBS takes over the bank, in a surprise move that is expected to cause turmoil in European debt markets when they open on Monday.
As part of the landmark deal between the banks, Swiss financial regulator Finma ordered an additional CHF16 billion of Credit Suisse Tier 1 (AT1) bonds, a relatively risky class of bank debt, to be written down to zero.
Credit Suisse said it was made aware of the regulator’s decision as it worked out the final details of its takeover of SFr3bn by UBS, which was announced on Sunday evening after several days of intense negotiations.
“The extraordinary government support will trigger a full write-down of the nominal value of all Credit Suisse AT1 shares in the amount of approximately 16 billion Swiss francs, and thus an increase in the capital base,” Finma said.
But several people involved in negotiating the deal said eliminating AT1 holders – a move that appeared to surprise markets – would have wider repercussions and likely lead to a sale of other bank debt.
Traders quoting Credit Suisse AT1 bond prices on Sunday afternoon had marked them up significantly after the Financial Times reported that the UBS takeover had been confirmed, hoping the deal would not lead to losses for bondholders.
“What Finma has done in breaking the capital structure will have long-term consequences for any Swiss financial debt,” said a Credit Suisse AT1 holder.
A banker said the decision could lead to a “nightmare” in European debt markets, especially as bondholders suffered heavier losses than Credit Suisse shareholders.
While AT1s are typically held by professional bond investors and hedge funds, they are also popular among retail and wealth management investors in Asia.
AT1s were introduced as part of post-global financial crisis regulatory reforms that pushed banks to raise their capital levels. AT1s are a form of contingent convertible security, or coco, that can be converted into equity if the bank runs into trouble.
If a bank’s equity ratio falls below a predefined threshold, AT1 investors may lose their principle or have their investment converted to equity.
As the riskiest form of bank debt in Europe, AT1s generally offer higher yields than safer bonds.
Credit Suisse’s deal echoes the takeover of Spanish lender Banco Popular in 2017, where the bank’s AT1 bonds were wiped out in the first example of the hybrid asset class’ collapse in value during rescue of a European bank.
Santander’s takeover was orchestrated by the European Central Bank’s oversight unit, the Single Resolution Body, after the ECB deemed the bank to be “failing or likely to fail”.