Nearly $17.3 billion in bonds issued by the troubled Credit Suisse bank have gone worthless overnight, thanks to competitor UBS Group AG’s takeover offer. UBS will write down the bank’s additional tier 1 (AT1) bonds as part of the merger agreement in order to improve core capital. The Swiss regulator FINMA announced that these bonds, which are frequently viewed as dangerous investments, will be written down to zero. The action, however, has enraged bondholders, who have lost their whole investment while stockholders continue to receive rewards as part of the takeover.
Credit Suisse, like UBS, was one of 30 globally systemically significant banks
“The extraordinary government support will trigger a complete write-down of the nominal value of all AT1 shares of Credit Suisse in the amount of around 16 billion [Swiss francs],” said FINMA. Analysts describe it as the worst loss inflicted on AT1 investors since the asset class was launched following the 2008 global financial crisis. The AT1 bonds were primarily designed to help failing banks absorb losses, lowering the likelihood of a taxpayer-funded rescue. Because of the higher risks, AT1 bonds offered a higher yield than most other bonds, and they quickly became a favorite of institutional investors.
Because of the Credit Suisse incident, most AT1 bondholders in Europe are seriously evaluating their investments. Many investors are concerned that their holdings will be wiped out if another bank fails, which is very possible given the current market conditions. Significantly, the Swiss National Bank (SNB) revealed on Sunday that UBS Group has agreed to pay $3.25 billion for its ailing rival Credit Suisse. The takeover is intended to keep economic upheaval from spreading across the country and beyond. Credit Suisse, like UBS, was one of 30 globally systemically significant banks. This means that the bank was thought to be “too large to fail” for the global banking system.
