In a repeat of what happened to holders of Yes Bank’s AT1 bonds, the UBS takeover of crisis-hit Credit Suisse has rendered $17 billion-worth bonds issued by Credit Suisse worthless. As part of the deal brokered by the Swiss government, it was decided that the high-risk Additional Tier 1 (AT-1) bonds issued by Credit Suisse will be written down even as equity shareholders of the bank are reportedly set to receive one UBS share for every 22.48 Credit Suisse shares they hold.
Earlier in the day, UBS agreed to take over Credit Suisse for almost $3.2 billion, and also to assume up to $5.4 billion in losses, to prevent further turmoil in the global banking system. It was then noted by several analysts that the profitable Swiss unit of Credit Suisse is alone worth more than three times of what UBS paid for the whole bank.
The writing down of AT1 bonds has not gone down well with the bondholders as it is the equity holders who are conventionally expected to foot the losses before bondholders, as per seniority of the capital structure. In a presentation made to its investors in the past week, Credit Suisse had informed that shareholders will take a hit before its AT1 holders in case any resolution process for the bank came up.
Responding to Swiss regulator FINMA’s announcement of the AT1 bond write-down, 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.”
The AT1 market in Europe is estimated to be worth $275 billion and the Credit Suisse write-down is the biggest blow in its history. In 2017, $1.44 billion-worth AT1 bonds were written down in Spain when Banco Popular was taken over by Banco Santander for €1 to avoid its collapse.
Closer home in India, the high-risk AT1 bonds have been in the news ever since Yes Bank decided to write-off AT1 bonds worth around Rs 8,400 crore as part of its restructuring plan. However, that decision was struck down by the Bombay High Court, and a challenge regarding the same is still ongoing in the Supreme Court.
AT1 bonds are considered to be high-risk debt instruments as it comes with a condition that banks can stop paying interest on it, or even write them off, in the face of a financial emergency. Under stable conditions, they offer higher returns than other debt papers, making them an appealing option for investors. Now, as the Yes Bank and Credit Suisse incidents have shown, it does not take much for the AT1 bonds to become worthless in a time of crisis.
It also becomes interesting to see whether the writing down of AT1 bonds by Credit Suisse will be featured in Yes Bank’s defence when it appears before the Supreme Court next.
