Credit Suisse deal: why are investors worried?
Senior officials at Switzerland’s top bank UBS and Swiss authorities raced against time over the weekend to broker a takeover of Credit Suisse in an effort to calm nerves and quell contagion fears.
The quickly concocted state-backed deal worth CHF3 billion (€3 billion, $3.23 billion) instilled investor optimism initially, but that soon withered. Bank stocks and bonds fell in Asia and Europe, with the Stoxx Europe 600 Banks sector index down more than 5% in morning trade. The index recovered slightly from the morning lows.
Shares in Credit Suisse fell more than 60% below their acquisition price and shares in UBS were also in the red, as were shares in Germany’s Deutsche Bank and France’s BNP Paribas. The Japanese yen, which is seen as offering investors relative safety in times of stress, bounced higher on Monday as investors refrained from indulging in riskier assets.
The carnage in the financial markets is being attributed mainly to one specific aspect of the Credit Suisse merger deal. Under the deal, holders of additional Tier 1 (AT1) bonds from the lender worth $17 billion (€16 billion) are to be eliminated.
The surprise move, which penalizes bondholders while preserving shareholders, unnerved investors in other banks’ AT1 debt, who fear other authorities could also topple the long-established hierarchy of investors, just as the Swiss government has done.
“This is controversial as common equity – which is typically considered junior to AT1 in the capital structure – has not been fully eliminated,” Andrew Kenningham, chief economist for Europe at Capital Economics, said in a note to clients. . “There could be legal challenges to the agreement, prolonging the process and creating more uncertainty.”
What are additional Tier 1 (AT1) titles?
AT1 bonds are a relatively risky class of debt issued by banks. Like other bonds, they pay regular interest but carry a higher coupon to account for the higher risk.
They were created after the 2008 global financial crisis as a hybrid debt designed to help shore up a bank’s finances in times of crisis, imposing losses on creditors and preventing taxpayers from footing the bill.
Also known as contingent convertible bonds, or CoCos, they can be converted into equity or written off when a bank’s capital levels fall below a specified threshold.
AT1 writedowns have occurred in the past, including during the takeover of troubled Spanish lender Banco Popular in 2017, where the bank’s AT1 bonds were written off as part of the rescue effort.
Speaking about the elimination of Credit Suisse’s AT1s, Jeffrey Gundlach, CEO and chief investment officer of DoubleLine Capital, tweeted that bondholders should have managed their risk better.
Why is the AT1 depreciation hurting the banking sector?
The Swiss authorities’ move shocked other AT1 bondholders, who appeared worried that they might face a similar fate at a time when the banking sector is reeling from bank collapses in the United States and fearing contagion risks.
This means that banks that have been paying a premium to raise funds with the sale of AT1 bonds may not find buyers for the hybrid debt, reducing their options for raising funds. AT1 bonds have been a crucial source of funding for banks.
AT1 prices in Asia fell on Monday, with the debt of some banks in the region falling by record levels, according to data compiled by the Bloomberg news agency.
HSBC’s 8% US dollar AT1 bond, issued on March 7, was trading at 90 cents on the dollar, down about 5 cents, recording its biggest daily drop since it began trading.
“What the market is saying today is that between now and maturity there is a risk that this debt has not been priced correctly in light of what is happening in banks across the US and around the world,” said Sean Darby, global equity strategist. actions. at Jefferies in Hong Kong.
Source: DW
Lori Barajas is an accomplished journalist, known for her insightful and thought-provoking writing on economy. She currently works as a writer at 247 news reel. With a passion for understanding the economy, Lori’s writing delves deep into the financial issues that matter most, providing readers with a unique perspective on current events.