Credit Suisse AT1 Fallout Ensnares Three More Japan Brokerages

SBI Holdings Inc., Rakuten Group Inc. and Monex Group Inc. are among brokerages in Japan that also sold Credit Suisse’s riskiest bonds to retail investors, highlighting the widening fallout of these products in the country.

(Bloomberg) — SBI Holdings Inc., Rakuten Group Inc. and Monex Group Inc. are among brokerages in Japan that also sold Credit Suisse’s riskiest bonds to retail investors, highlighting the widening fallout of these products in the country.

The operators of the nation’s three major online brokerages offered the Swiss lender’s Additional Tier 1 notes for a minimum purchase amount of $200,000, according to copies of the firms’ product explanatory materials seen by Bloomberg News. The documents obtained also raised questions over whether information over the risks associated with the product was properly disclosed to investors.

Switzerland’s decision in March to write down the bonds as part of a government-led rescue of Credit Suisse shocked investors in Japan, who bought around 140 billion yen ($1 billion) worth of the debt. Clients of Mitsubishi UFJ Financial Group Inc.’s securities venture with Morgan Stanley took the lion share of the hit. The debacle in a country that’s trying to push its citizens to invest more has prompted regulators to look into whether the firms properly explained the risks before selling the bonds. 

“In consideration of the product characteristics of AT1 bonds of Credit Suisse Group AG, we have sold those securities to customers to whom we thought the products would be suited, after having sales staff explain about them in person,” an SBI spokesperson said by email, in response to questions about the documents. 

Rakuten Securities Inc. sold the debt through its business partners called independent financial advisers and is “reviewing and inspecting” its sales practices and explanatory materials, a spokesperson said by email. The firm will “continue to follow up” with the buyers and “appropriately respond” should they decide to escalate the issue, she said. 

A Monex spokesperson declined to comment on the sales.

Viability Event

The three firms declined to disclose the volume of Credit Suisse AT1 bonds they’ve sold. They also didn’t comment on whether they had explained so-called viability event provisions to clients verbally or in writing.  

In the foreign securities information brochures, bond summaries, and pre-contract documents prepared in Japanese for buyers by SBI, Rakuten or Monex — obtained and reviewed by Bloomberg News — there is no mention that one of the debt’s features is it would be fully written down if “viability” events happen. Those events include extraordinary support from the public sector, based on the bond’s English prospectus. Swiss officials used that provision in proceeding with the wipe out on the Credit Suisse AT1 bondholders, as they engineered a rescue by UBS Group AG. 

Monex and Rakuten’s foreign securities information and bond summaries state that the bond’s principal would be “reduced” should Credit Suisse’s common equity tier 1 ratio — a measure of financial strength — falls below 7%. SBI’s documents say the entire principal would be lost if the ratio falls below 7% or if authorities determined Credit Suisse has no chance of surviving. 

–With assistance from Taiga Uranaka, Nao Sano and Rie Morita.

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