Investors who purchased $17 billion worth of Credit Suisse bonds were outraged after Swiss regulators approved a $3.2 billion rescue by rival UBS which left them holding the bag.
Holders of so-called “AT1,” or additional tier 1 bonds, purchased through Credit Suisse were shocked to learn that their investments were wiped out in the deal — a move that some claimed is illegal.
“In my eyes, this is against the law,” Patrik Kauffman, a fund manager at Aquila Asset Management, a firm that invests in AT1 bonds, told the Financial Times.
The “shotgun wedding” sale of the 166-year-old Credit Suisse to its historic arch-enemy is the latest shock to the global financial system — with analysts wondering whether more European banks were due to fall.
Shares of UBS rebounded in European markets on Monday afternoon — reversing an earlier slide. UBS stock was up some 2% in Zurich while Credit Suisse shares cratered by some 60%.
As a result of the deal, UBS has seen its total assets balloon to a whopping $5 trillion.
The lender will also benefit from a special government waiver allowing it to keep Credit Suisse’s profitable unit that was purchased at a discount.
UBS also managed to secure billions of dollars worth of guarantees from the Swiss government aimed at covering losses.
AT1 bonds, which are also known as “contingent convertibles,” are bonds that were created after the 2008 financial crisis.
These debt instruments, which count towards banks’ regulatory capital, are considered riskier.
While they typically provide a higher yield than most other bonds, they can also be either converted into equity or written down entirely if a lender goes under.
Kauffman described the writedown as “insane,” telling FT: “We’ve never seen this before. I don’t think this would be allowed to happen again.”
The takeover by UBS, which was pushed by Swiss authorities who were looking to shore up confidence in the shaky global banking system in the wake of the collapse of Silicon Valley Bank and Signature Bank of New York, also resulted in a loss for Credit Suisse shareholders.
Equity holders of Credit Suisse will receive 0.76 Swiss francs — or 82 cents — per share — which is well below the bank’s closing price of around $2 per share.
But the AT1 bloodbath had bondholders seeing red.
“Everyone knows that when you’re buying AT1 bonds you’re taking risk and you’re there to absorb losses,” Jérôme Legras of Axiom Alternative Investments told FT.
“But show me the losses — there’s still 45 billion Swiss francs ($48.62 billion) of equity in the bank,” he said.
“Shareholders got 3 billion Swiss francs ($3.2 billion) and AT1 holders got nothing, which is a reversal of the usual hierarchy.”
The $17 billion wipeout is the largest loss in the $275 billion AT1 debt market to date.
Bid prices on AT1 bonds from banks including Deutsche Bank , HSBC , UBS and BNP Paribas dropped 9-12 points on Monday, sending yields sharply higher, data from Tradeweb showed.
At Credit Suisse itself, dollar AT1 bonds were bid as low as 1 cent on the dollar, Tradeweb pricing showed, as investors braced for the wipeout.
With Post wires
