It’s not just shareholders and employees who are hard hit by Credit Suisse's rescue takeover by UBS, bondholders with 16 billion Swiss francs worth in debt are also bearing the brunt.
The Swiss Financial Market Supervisory Authority (Finma) ruled that 16 billion Swiss francs ($17 billion) of AT1 debt is to be written off to zero as part of the bank’s rescue merger, making investors in Credit Suisse’s Additional Tier 1 (AT1) bonds among the biggest losers of the takeover.
It also represents the biggest loss ever for Europe's $275 billion AT1 financial market.
While Finma argues the move strengthens core capital, the measure is not uncontroversial, considering in a regular write-down scenario, shareholders are the first to take a hit before AT1 bonds suffer losses.
Yet through Sunday’s negotiated terms, shareholders are receiving three billion francs in return for their Credit Suisse shares, while bondholders will be left empty-handed.
Crisis CoCos
AT1 bonds were created after the financial crisis in Europe as banks were forced to issue so-called «contingent convertibles», or CoCos, in addition to pure equity, which could be converted quickly into equity or simply written off in the event of a crisis.
They are part of a buffer of debt and equity designed to prevent taxpayers from having to pay for a bank's collapse.
Credit Suisse had 13 CoCos outstanding totaling $17.3 billion issued in Swiss francs, US dollars, and Singapore dollars, according to data compiled by «Bloomberg» (behind paywall). Asset managers affected include Pacific Investment Management, Invesco and BlueBay Funds.
Finma's move could now make it more difficult for other lenders to raise capital via new AT1 bonds and could also be why bond markets remain choppy, according to the report.
