The $17 Billion Wipeout of Credit Suisse Bondholders Has Not Gone Down Well in Europe
The battle of Cocos. Swiss authorities made a mistake with consequences and potentially a host of court cases. They wiped out $17 billion of Additional Tier 1 bonds ( or Contingent Convertible Bonds or Cocos).These were invented after the 2008 crisis to shore up banks’ capital 1/
— Vitor Constâncio (@VMRConstancio) March 20, 2023
- The AT1 (Additional Tier 1) bond market is about $250-275B in Europe. What the Swiss have done is re-write the rules of seniority in payment (ie. who get paid first). So, AT1 bond holders are now starting to react negatively by selling these AT1 bonds (in other financial institutions). Contagion is spreading. See:
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What are AT1 bonds and why are Credit Suisse’s now worthless?
European bank supervisors step in to stem rout in bonds
AT1 Bond Rout Prompts European Officials to Try to Calm Market
– - The $17 Billion Wipeout of Credit Suisse Bondholders Has Not Gone Down Well in Europe
by Sophie Kiderlin, https://www.cnbc.com/
* 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 bondholders as their investments have seemingly been lost.
* Credit Suisse’s takeover deal, worth $3.2 billion, by rival Swiss bank UBS was agreed Sunday with the help of Swiss authorities.
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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.
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The move has angered Credit Suisse AT1 bondholders 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.
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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.
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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.”
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