© Reuters. FILE PHOTO: A logo is seen at Credit Suisse bank in Geneva, Switzerland, March 15, 2023. REUTERS/Denis Balibouse/File Photo
By Pablo Mayo Cerqueiro, Chiara Elisei and Davide Barbuscia
LONDON/NEW YORK (Reuters) – Credit Suisse said 16 billion Swiss francs ($17.24 billion) of its additional Tier 1 debt will be reduced to zero by order of the Swiss regulator as part of its rescue merger with UBS, that angered bondholders over Domingo.
FINMA, the Swiss regulator, said the decision would strengthen the bank’s capital. The move reflects the authorities’ desire to see private investors share the pain of Credit Suisse’s woes.
President Marlene Amstad said FINMA had stuck to the country’s “too big to fail” banking framework in making the decision.
It means AT1 bondholders appear to be left with nothing, while shareholders, who fall below the bonds on the priority scale for payment in bankruptcy proceedings, will receive $3.23bn under the UBS deal.
Designed in the aftermath of the global financial crisis, AT1 bonds are a form of junior debt that counts towards banks’ regulatory capital. They were designed as a way to transfer risk to investors and away from taxpayers if a bank runs into trouble.
Bonds can be converted to shares or redeemed when a lender’s capital reserves erode beyond a certain threshold.
“It’s surprising and hard to understand how they can reverse the hierarchy between AT1 holders and shareholders,” said Jerome Legras, head of research at Axiom Alternative Investments, an investor in AT1 debt at Credit Suisse.
Reuters reported on Sunday that Swiss authorities were considering imposing losses on bondholders as part of the bailout deal.
UBS Chief Executive Ralph Hamers told analysts that the decision to zero out AT1 bonds was made by FINMA, so it would not create a liability for the bank.
Credit Suisse’s AT1 debt had been rallied on Sunday amid reports shareholders would get something in a deal with UBS, raising hopes bondholders would be protected.
Bonds had plunged into troubled territory before the weekend amid growing concerns about the health of the Swiss lender.
The Swiss regulator’s move could make it more difficult for other lenders to obtain new AT1 debt, investors said.
“It will make AT1 bonds more expensive for all other banks going forward, because now everyone else will see this additional risk,” said Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors.
AT1s pay higher interest, as they carry more risk for investors than regular debt.
Before the news on Sunday, investors were concerned that banks would expand outstanding AT1 bonds to avoid refinancing on worse terms due to higher interest rates.
($1 = 0.9280 Swiss francs)
