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Bond Market News

$17bn of Credit Suisse AT1 Perps Wiped Out Following UBS Deal

In the latest development in the Credit Suisse (CS) turmoil, UBS Group has agreed to takeover CS for a consideration of CHF 3bn ($3.3bn). This comes after several rounds of intense discussion and negotiation along with the regulators over the weekend. The all-share deal will include extensive guarantees from the government and liquidity provisions.

As part of the deal, FINMA, the Swiss regulator, said via a statement that CHF 16bn ($17.3bn) of Credit Suisse’s additional tier 1 (AT1) perpetual bonds will be completely written-off to zero. This marks the biggest loss ever for the $275bn European AT1 market and follows the 2017 write-off of €1.35bn ($1.4bn) worth of subordinated bonds of Banco Popolar when it was taken over by Banco Santander. The announcement regarding Credit Suisse’s AT1s has irked many bondholders as, based on the typical capital structure of a bank, shareholders should be the first to be wiped out. In CS’ case however, shareholders are set to receive CHF 3bn ($3.3bn) in UBS stock from the deal while AT1 holders are completely wiped out. The illustration below explains the typical capital structure of a bank/corporate and who gets priority of repayment.

Seniority-Ranking-of-Corporate-Bonds1-1080x675

To better understand the key risks associated with AT1 perpetual bonds, click here.

Patrik Kauffmann, a portfolio manager at Aquila Asset Management told Bloomberg, “This just makes no sense. This will be a total blow to the AT1 market. You can quote me on that.” He added that the sale proceeds should have gone to AT1 bondholders as “seniority in the capital structure need to be respected.”

Most of Credit Suisse’s USD AT1s are being quoted at between ~20-30 cents on the dollar. For instance, Credit Suisse’s 9.75% Perp is quoted at 31.22 cents on the dollar as of the morning of 20 March 2023.

For the latest Credit Suisse bond prices, click here.

 

 

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