Banks’ riskiest bonds advanced in Europe and Asia after panic subsided, and investors heeded regulators’ assurances that the wipeout in Credit Suisse Group AG’s Additional Tier 1 notes wouldn’t happen in their jurisdictions under similar circumstances.
(Bloomberg) — Banks’ riskiest bonds advanced in Europe and Asia after panic subsided, and investors heeded regulators’ assurances that the wipeout in Credit Suisse Group AG’s Additional Tier 1 notes wouldn’t happen in their jurisdictions under similar circumstances.
Commerzbank AG, Deutsche Bank AG and Intesa Sanpaolo SpA led the gain in AT1s, following a recovery in Asia, where bonds including those from Westpac Banking Corp. were quoted higher. The notes have only recovered some of their losses. Credit risk across both regions also fell, with indexes tracking credit default swaps linked to high-yield and investment-grade bonds in Europe erasing most of their widening since Credit Suisse roiled global markets.
“The fact that central banks and regulators in euro zone and UK came out and said ‘this is a Swiss decision and this is not the way in Europe,’ — this commitment on the AT1 asset class was important, it came quickly and it was good news,” said Erick Muller, head of product and investment strategy at Muzinich & Co. in London.
UK and European authorities sought to restore calm in markets by reiterating that AT1 bonds would bear losses only after equity holders have been fully wiped out. The asset class on Monday suffered its biggest loss on record, according to an index tracking European bonds, after a UBS Group AG takeover of Credit Suisse wrote down 16 billion francs ($17.3 billion) of the lender’s AT1s, even though shares weren’t wiped out entirely. The deal raised questions among investors about legal certainty in Switzerland.
Commerzbank’s €500 million ($538 million) 4.25% perpetual note is up about 5 cents to 69.4, according to pricing source CBBT, at 10:40am London, while Deutsche Bank’s €1.25 billion 4.5% note rose 4.7 cents to 68.1. It echoes similar moves in Asia, where Westpac Banking Corp.’s perpetual bonds rose alongside HSBC Holdings Plc. and AIA Group Ltd.
“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.”
AT1 bonds were introduced in Europe after the global financial crisis to serve as shock absorbers when banks start to fail. They are designed to impose permanent losses on bondholders or be converted into equity if a bank’s capital ratios fall below a predetermined level, effectively propping up its balance sheet and allowing it to stay in business. Credit Suisse’s write down is the biggest loss yet for Europe’s $275 billion AT1 market.
Credit Suisse’s AT1s are being quoted at just a few cents.
–With assistance from Ameya Karve, Hannah Benjamin-Cook, Beth Thomas, Ronan Martin and John Cheng.
(Updates with charts, new quote and bond prices in fifth paragraph.)
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