Credit Suisse wipe out may have ‘destroyed’ AT1 bond market, but Asia-Pacific protected by more supportive authorities

Credit Suisse’s order of loss absorption is ‘definitely wrong, and broke the rules in the capital market’, Neuberger Berman executive says

Asia-Pacific market on the lookout for contagion risks

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The decision on Credit Suisse’s AT1 notes does not respect a bank’s hierarchy of claims and calls into question the viability of AT1s as an asset class, according to an analyst. Photo: Bloomberg

Published: 5:33pm, 21 Mar 2023

The wipe out of Credit Suisse’s riskiest bonds is expected to continue to weigh on the more than US$250 billion Additional Tier-1 (AT1) bond segment and threaten an important funding channel for banks, as investors question the viability of these securities as an investment asset, analysts said.

And while the repercussions for banks in Asia-Pacific are currently being viewed as controllable, given the fact that local authorities are “more friendly” towards bondholders, the market is still watching out for contagion risks.

AT1 notes are debt securities created after the 2008 financial crisis aimed at making bondholders absorb losses to allow a bank to stay afloat, while reducing the chance of bailouts using taxpayers’ money. These risky bonds are also called “contingent convertibles” or “CoCos”, as they can be converted into equity of a failing bank, or written down to zero.

Following the takeover of Credit Suisse by Swiss peer UBS Group, its AT1 notes worth 16 billion Swiss francs (US$17 billion) will be written down to zero as part of government-led efforts to limit risks to the global financial system. The surprising move upends the order of investor protection, where shareholders usually absorb losses ahead of bondholders.

The order of loss absorption is “definitely wrong, and broke the rules in the capital market”, said Peter Ru, managing director and China fixed-income strategy leader at Neuberger Berman based in Shanghai. “The government intervention was too severe and has destroyed the AT1 market.”