Two months after many investors were caught off guard by the writedown of Credit Suisse Group AG’s Additional Tier 1 bonds, the securities are once again at the center of a market debate. This time the divide is over whether the event will trigger an insurance payout.
(Bloomberg) — Two months after many investors were caught off guard by the writedown of Credit Suisse Group AG’s Additional Tier 1 bonds, the securities are once again at the center of a market debate. This time the divide is over whether the event will trigger an insurance payout.
Funds including FourSixThree Capital and Diameter Capital Partners have been buying credit default swaps linked to another set of junior Credit Suisse bonds, betting that the derivatives panel tasked with overseeing the market will rule that a credit event has occurred. Law firm Kramer Levin has been helping with efforts to make a case for a triggering event.
Meanwhile, traders and strategists at Citigroup AG and Barclays Plc told clients on Thursday that the AT1s are likely to be deemed more junior to the subordinated notes linked to the CDS, making a payout unlikely.
“These matters are complex,” it’s hard to imagine the CDS being linked to the AT1s, a Citi strategist wrote in a note to clients on Thursday. A spokesperson for Citi and Barclays declined to comment.
The spread on five-year credit default swaps tied to Credit Suisse bonds has widened 140 basis points this week to close to 420 basis points, according to CMAI prices. The equivalent one-year contract widened 422 basis points on Thursday to 889 basis points.
The debate may take weeks to resolve after a question on whether a so-called governmental intervention credit event had occurred was submitted to the derivatives panel on Thursday. If the group of 13 banks and asset managers accept the question for consideration, a decision on whether to pay out may only be made after multiple meetings.
Markets were divided for weeks before the AT1 writedown over whether the $17 billion of debt would be swept up in a broader rescue of the beleaguered bank. Many investors who held the notes ahead of Credit Suisse’s merger with UBS Group AG or bought them at near zero prices immediately after have since filed legal challenges against the regulator’s decision to rank holders of the debt below shareholders, who managed to salvage some compensation.
–With assistance from Libby Cherry and Luca Casiraghi.
(Updates CDS prices in fourth paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.