T.he is in a hurry arranged purchase of the bank Credit Suisse UB, its great rival, is reverberating in the financial markets. Investors are scrambling to understand the deal and gauge the ripple effects. One is already clear. Decision to write off approximately 16 billion francs ($17 billion) in additional Tier 1 (and1) The bonds issued by Credit Suisse have caused anger and pain elsewhere, while shareholders have suffered huge losses. Some observers fear it could even mean the end of the asset class.
and1 The security is a type of “contingent convertible” (coco) bond that was part of a toolkit created after the global financial crisis of 2007-2009 to prevent future bailouts. . In good times, it behaves like a relatively high-yielding bond.when things turn sour When a trigger point is reached, such as a bank’s equity falling below a certain level relative to its assets, the bonds are converted into equities, reducing the bank’s liabilities and absorbing losses. In the post-collapse sequence, and1 Bondholders must come between the senior bondholders, who are entitled to receive payments first, and the shareholders who, in theory, suffer losses first.
Credit Suisse rocked the market and1 bond currently worth about $275 billion for two reasons. One is the scale of depreciation, which is somehow the largest in Cocos history. The other is that the shareholders have appeared on top. and1 bondholder in the hierarchy. When midsize Spanish lender Banco Popular collapsed in his 2017, it needed about $1.4 billion. andOne bond — less than 10% of Credit Suisse write-downs. Importantly, Banco Popular’s shareholders were also wiped out. The bank was sold to local rival Santander for a nominal price of €1 ($1.11).
Credit Suisse bond issuance documents appear to give shareholders an edge. They are, and1 The bond purchaser has waived its right to redemption in a “reduction event”. But the idea that shareholders are left with something and coco owners are left with nothing is a hybrid that is somewhere between what many buyers are buying: the equity and debt of the capital stack. It goes against the understanding I had of securities. This is reflected in the sale of some bank debt on March 20th.Deutsche Bank weighted average price andFor example, one bond fell nearly 9.5%.
Cocos subscribers may be the first to get upset. As recently as his January, the investment committee of Swiss private bank Union Banquet Privé argued that Coco’s high yield was an attractive investment in the context of the European banks’ strong balance sheets. . Asian private banks have historically been eager buyers, rushing to issue for their ultra-high net worth clients.
Commentary on the future of the asset class ranges from bleak to apocalyptic. Goldman Sachs warns that it is currently difficult to assess attractive spreads between yields. andThis is due to the lack of clarity about how future resolutions will work. Some take a more extreme view. “Credit Suisse may not be the only one to die today,” said Louis-Vincent Gave, co-founder of research firm Gavekal. ”
Cocos has faced and survived criticism before. In 2016, the market continued despite the near-death experience. and1 Bonds issued by Deutsche Bank when it was unclear whether Deutsche Bank would be able to pay interest. In 2020, when Indian lender Yes Bank collapsed, andOne investor went to zero while shareholders were allowed to limp. This time, on March 20, the Eurozone regulator quickly issued a statement saying it was under scrutiny. and1 Bonds should be more viable, as they are written down only after the common equity instruments have absorbed losses.
But if you look at the example of Credit Suisse, investors have reason to doubt such fine words. And if regular Coco buyers feel burned, they are much less likely to return to the market. The last thing banks need when they are already facing pressure is the decline in aspiring investors. ■
https://www.economist.com/finance-and-economics/2023/03/20/credit-suisses-takeover-causes-turmoil-in-a-275bn-bond-market Credit Suisse takeover wreaks havoc in $275 billion bond market