Additional Tier 1 bonds issued by banks in Asia Pacific rebounded, with shares also rising, as reassurances by regulators helped restore some confidence in the risky debt after a market rout.
(Bloomberg) — Additional Tier 1 bonds issued by banks in Asia Pacific rebounded, with shares also rising, as reassurances by regulators helped restore some confidence in the risky debt after a market rout.
Thirty-seven of the 38 AT1 dollar bonds to trade as of 12:49 pm in Hong Kong gained, with Westpac Banking Corp.’s perpetual notes rising by a record, according to prices compiled by Bloomberg. The MSCI Asia Pacific Financials Index added 0.9% after sliding to the lowest since November on Monday.
The market for such risky debt, a key funding source for banks, seized up on Monday when the Swiss government-led rescue of Credit Suisse Group AG led to a wipeout of its AT1 bonds while privileging equity investors. European authorities stepped in on Monday to restore confidence by reiterating the usual hierarchy for claims. Credit default swaps in Asia also rallied in a sign that investors see financial stress easing.
“Investor optimism was given a band aid assurance by EU and UK regulators, while corporates also rushed in to restore optimism,” said Jessica Amir, a market strategist at Saxo Capital Markets. “But concern still remains.”
The cost to insure Asia ex-Japan’s investment-grade dollar notes against default is heading for its biggest daily drop in more than three months.
HSBC Holdings Plc. and AIA Group Ltd. both climbed more than 3% in Hong Kong trading. The 10-day volatility measure on the region’s financial stocks hit its highest since March 2022.
Financial assets across Asia and Europe tumbled on Monday as the takeover of Credit Suisse by bigger rival UBS Group AG in a government-brokered deal rendered 16 billion francs ($17.3 billion) of the former’s AT1 debt worthless and raised questions among investors about legal certainty in Switzerland.
Among the AT1 bonds in Asia, three of the four biggest gainers have terms that will convert the bonds into equity if the issuer runs into trouble. Notes that have a temporary write-down clause, which gave some protection for investors instead of a permanent write-down, were also among the biggest movers.
Financial Resilience
“There are good reasons for investors to come back after the storm is temporarily over,” said Francis Chan, a Bloomberg Intelligence analyst. “Financial stocks in Asia are mostly resilient in different metrics, and not likely to face the kind of bank run or bond losses like what happened to Silicon Valley Bank.”
“At the same time, there’s no confidence crisis to the big financial firms in the region, like what happened to Credit Suisse,” he said.
Perpetual notes from Macquarie Bank Ltd. jumped 8.4 cents to 87.8 cents while similar debt sold by Westpac surged 5.7 cents against the dollar to 84.7 cents, according to prices compiled by Bloomberg.
AT1 notes were created after the 2008 global financial crisis to ensure that losses in times of crises would be borne by investors, rather than taxpayers bailing out borrowers.
Read: Call Them CoCos or AT1s, Here’s Why They Got Zeroed: QuickTake
–With assistance from Ishika Mookerjee and Ameya Karve.
(Updates with moves in stocks in second paragraph, quote in third paragraph.)
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