Credit Suisse’s additional tier one bonds are set to be wiped out following the struggling bank’s takeover by UBS.
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One section of Credit Suisse’s bondholders is set to be wiped out following the struggling bank’s takeover by UBS, causing them to see investments worth 16 billion Swiss Francs ($17 billion) become worthless.
The Swiss regulator FINMA announced Sunday that the so-called additional tier one bonds, which are widely regarded as relatively risky investments, will be written to zero as part of the deal.
The move has angered Credit Suisse AT1 bond holders as their investments have seemingly been lost, while shareholders will receive payouts as part of the takeover. Usually, equity investments would be classed as secondary to AT1 bonds.
Therefore, the decision “can be interpreted as an effective subordination of AT1 bondholders to shareholders,” Goldman Sachs’ credit strategists said in a research note published Sunday.
“It also represents the largest loss ever inflicted to AT1 investors since the birth of the asset class post-global financial crisis,” they added.
However, FINMA’s move should not come as a shock, Elisabeth Rudman, global head of financial institutions at DBRS Morningstar, told CNBC’s “Squawk Box Europe” on Monday.
“AT1s are there to absorb losses, so it’s not a surprise,” she said. “They’ve done what they were supposed to do.”
AT1 bonds, also known as contingent convertibles or “CoCos,” are a type of debt that is considered part of a bank’s regulatory capital. Holders can convert them into equity or write them down in certain situations – for example when a bank’s capital ratio falls below a previously agreed threshold.
AT1s were created in the aftermath of the financial crisis as a way of shifting risks away from taxpayers in crisis situations. Due to their higher risk factor, they often have higher yields than other bonds.
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