Proactive Investors -
- FTSE 100 pushes higher, up 42 points
- UBS rescues Credit Suisse (SIX:CSGN) in US$3.25bn deal
- Central banks launch new liquidity measures
Credit Suisse bondholders nurse wounds
Equities continue to bounce back on Monday with the FTSE 100 now at 7,377.49, up 42.09 points, or 0.57%.
But Credit Suisse bondholders are licking their wounds after the rescue deal by rival UBS resulted in US$17bn of the failed Swiss bank’s bonds being wiped out, upending debt recovery norms and further eroding financial market confidence.
“In my eyes, this is against the law,” said Patrik Kauffman, a fund manager at Aquila Asset Management who invests in additional tier 1 (AT1) bank debt, quoted by the Financial Times.
He said it was “insane” that under the terms of UBS’s takeover of Credit Suisse, AT1 bondholders were set to receive nothing while shareholders would walk away with SFr3bn (US$3.2bn).
“We’ve never seen this before. I don’t think this would be allowed to happen again.”
AT1 bonds were introduced in Europe after the global financial crisis to serve as shock absorbers when banks start to fail.
They are designed to impose permanent losses on bondholders or be converted into equity if a bank’s capital ratios fall below a predetermined level, effectively propping up its balance sheet and allowing it to stay in business. Its market size is estimated to be US$275bn in Europe.
The Swiss authorities’ decision to leave AT1 bondholders with nothing has turned upside down the long-established norms of debt investors being prioritised over equity holders in a debt recovery.
Some investors said reversing the market norms could herald a significant reduction in appetite for AT1s. “This could be the end of that market for the foreseeable future,” said Jim Leaviss, chief investment officer of public fixed income at M&G, quoted by the FT.
“Global investors won’t be interested for a while or at least until the yields adjust significantly higher, but at that point, the yields will likely be too high for banks to want to issue them as a cheaper source of funding than equities.”
The ECB questioned the Swiss authorities’ move on Monday, saying equity instruments “are the first ones to absorb losses” and only after that would AT1s need to be written down. “This approach has been consistently applied in past cases,” the ECB said, adding that AT1 debt remained “an important component of the capital structure of European banks”.
French insurer AXA stated it had a "limited exposure" of about €0.6 bn Credit Suisse (CSGN.S) but less than €20mln exposure to AT1s.
According to data on Bloomberg, Pacific Investment Management Co., Invesco Ltd (NYSE:IVZ) and BlueBay Funds Management Co. SA are among the many asset managers holding Credit Suisse AT1 notes, although these holdings may have changed or been sold entirely since their last regulatory filings.
One fund under pressure was the Invesco AT1 Capital Bond ETF, whose share price slumped nearly 9%. It tracks the performance of an index of AT1 bonds including some issued by Credit Agricole (EPA:CAGR), Barclays (LON:BARC), Lloyds (LON:LLOY) and UBS.
German economy to contract in first quarter - Bundesbank
The German economy will shrink again in the first quarter of the year and underlying inflation could prove to be stubborn even if overall price growth is likely to slow sharply soon, the Bundesbank said in a monthly report on Monday.
In the report, the German central bank said: ““German economic activity will probably fall again in the current quarter.”
“However, the decline is likely to be less than in the final quarter of 2022.”
German GDP shrank by 0.4% in the final quarter of 2022. A second consecutive drop in activity in the first three months of this year would put Germany into a technical recession.
On inflation, the Bundesbank said that inflation is likely to fall this month but "the core rate is proving exceptionally persistent and could even increase slightly towards the middle of the year".
SVB UK dishes out bonuses days after rescue - reports
The British arm of Silicon Valley Bank (SVB UK) has handed out millions of pounds in employee bonuses just days after its insolvency was averted through a Bank of England-orchestrated rescue deal.
Sky News reported that the payouts to staff including its senior executives were signed off by HSBC (LON:HSBA), SVB UK's new owner, last week.
Sources described the bonus pool as "modest", and said it totalled between £15mln and £20mln.
Sky said it was unclear how much had been awarded to Erin Platts, the UK bank's chief executive or her senior colleagues.