About 16 billion Swiss francs ($17.3 billion) of Credit Suisse Group AG bonds became worthless after the company was taken over by rival UBS Group AG.
The deal will trigger a “complete reduction” of the bank’s additional Tier 1 bonds to increase the capital base, Swiss financial regulator FINMA said in a statement posted on its website.
The bond write-off is the biggest loss to date for Europe’s $275bn AT1 market, far eclipsing the roughly €1.35bn loss suffered by junior bondholders of the Spanish lender Banco Popular SA in 2017, when it was absorbed by Banco Santander SA to avoid a collapse. .
AT1 bonds were introduced in Europe after the global financial crisis to act as shock absorbers when banks began to fail. They are designed to impose permanent losses on bondholders or be converted into equity if a bank’s capital ratios fall below a predetermined level, thereby strengthening its balance sheet and allowing it to remain in business.
Investors feared that a so-called bail-in would lead to AT1s depreciating, while senior debt issued by the holding company, Credit Suisse Group, would be converted into equity for the bank.
AT1 Bonds
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. Their holdings may have changed or been entirely sold since their last regulatory filings.
Pimco and BlueBay declined to comment when contacted by Bloomberg News on Friday ahead of the deal announcement. A spokeswoman for Invesco said that “due to portfolio disclosure policies, we will not disclose any current movements in the portfolios, but our investment teams continue to monitor developments and carefully manage the assets of our customers in light of current market conditions”.
On Friday, bonds were already trading at levels usually reserved for companies on the verge of bankruptcy. A slice of the bank’s $1.65 billion note, issued less than a year ago, changed hands at about 35 cents on the dollar, according to the Trace exchange reporting system.
Earlier on Sunday, prices fluctuated as traders weighed two opposing scenarios: either the regulator would nationalize part or all of the bank, possibly canceling Credit Suisse’s AT1 bonds entirely, or a takeover of UBS with potentially no loss for bondholders.
The broader market for these risky European bank bonds, also known as contingent convertibles or CoCos, has also fallen over the past two weeks, with the average AT1 now priced at just 82% of value. nominal, one of the largest discounts on save.
