Credit Suisse’s AT1 Bond Wipeout Seen as an Exception in Europe

A total write-down of additional tier 1 bonds, as happened at Credit Suisse Group AG, is not the norm, with risky bonds at most other banks in Europe and the UK having more protections, according to Bloomberg Intelligence.

(Bloomberg) — A total write-down of additional tier 1 bonds, as happened at Credit Suisse Group AG, is not the norm, with risky bonds at most other banks in Europe and the UK having more protections, according to Bloomberg Intelligence.

Only the AT1 bonds of Credit Suisse and Swiss rival UBS Group AG have language in their terms that allows for a permanent write-down, BI senior credit analyst Jeroen Julius said. Other large banks in the European Union and UK are split between allowing for the temporary write-down of AT1s or equity conversion. In these mechanisms, AT1 holders could have more protection from a complete wipeout.

The European Banking Authority weighed in on Monday, saying in a statement that “common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier One be required to be written down.”

In a move that shocked credit markets, Credit Suisse’s 16 billion Swiss francs ($17.2 billion) of risky bonds are now worthless after the government-brokered takeover of the lender by UBS. The deal will trigger a “complete write-down” of the AT1s in order to increase core capital, Swiss financial regulator FINMA said in a statement on Sunday. 

AT1s issued by other European lenders plunged on Monday, with investors poring through the fine print of their holdings to understand if authorities in other countries could repeat what happened in Switzerland.

In a typical writedown scenario, shareholders are the first to take a hit before AT1 bonds face losses, as Credit Suisse also guided in a presentation to investors recently. That’s why the decision to write down the bank’s riskiest debt — rather than its shareholders — provoked a furious response from some the AT1 bondholders.

The wipeout has shaken a $275 billion market for bank funding, with Goldman Sachs Group Inc. ready to start trading claims in Credit Suisse’s AT1s. Investors in the claims would be making a bet that they can ultimately recover some value, potentially through litigation. AT1 bonds were introduced after the global financial crisis to ensure losses would be borne by investors not taxpayers. 

If the AT1 new-issue market reopens, equity conversion may become the dominant loss-absorption mechanism to reassure investors that they won’t be wiped out ahead of shareholders, BI’s Julius said.

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