Benzinga - Credit Suisse Group AG (NYSE:CS) said on Sunday 16 billion Swiss francs ($17.24 billion) of its additional tier 1 (AT1) debt, a type of bond, will be written down to zero on the orders of the Swiss regulator FINMA as part of its rescue merger with UBS Group AG (NYSE:UBS).
AT1 is used to shore up a bank's regulatory capital base and often carries a higher yield because of its risky nature. The bonds do not have a fixed tenor but usually have a Call option embedded that can be used by the issuer to withdraw the bonds from the market. These bonds can be converted into equity or written down if a lender’s capital buffers are eroded beyond a certain point.
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What Happened: The decision by the Swiss regulator would mean AT1 bondholders may be left with nothing while shareholders, who sit below bonds in the priority hierarchy for repayment in a bankruptcy process, will get $3.23 billion under the deal, reported Reuters.
Jerome Legras, head of research at Axiom Alternative Investments, who is an investor in Credit Suisse’s AT1 debt told Reuters, "It’s stunning and hard to understand how they can reverse the hierarchy between AT1 holders and shareholders."
UBS CEO Ralph Hamers had told analysts the decision to write down the AT1 bonds was taken by FINMA, so it would not create a liability for the lender, the report said. Credit Suisse’s AT1 bonds had rallied earlier on Sunday amid reports shareholders would receive something in a deal with UBS which sparked optimism that bondholders would be protected, it said.
Fund Raising: The move by FINMA could make it difficult for other lenders to raise funds via new AT1 debt, investors said.
“It’s going to make the AT1 bonds more expensive for all the other banks going forward because now everyone else is going to see this extra risk,” Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors told Reuters.
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