Credit Suisse’s $17B of risky bonds now worthless after takeover by UBS

The deal will trigger a “complete write-down” of the bank’s additional tier 1 bonds in order to increase core capital, Swiss financial regulator FINMA said in a statement on its website.

The bond wipe out is the biggest loss yet for Europe’s $275 billion AT1 market, far eclipsing the approximately €1.35 billion loss suffered by junior bondholders of Spanish lender Banco Popular SA back in 2017, when it was absorbed by Banco Santander SA to avoid a collapse.

AT1 bonds were introduced in Europe after the global financial crisis to serve as shock absorbers when banks start to fail. They are designed to impose permanent losses on bondholders or be converted into equity if a bank’s capital ratios fall below a predetermined level, effectively propping up its balance sheet and allowing it to stay in business.

Investors had been concerned that a so-called bail-in would result in the AT1s being written down, while senior debt issued by the holding company, Credit Suisse Group, would be converted into equity for the bank.

AT1 bondholders

Pacific Investment Management Co., Invesco Ltd. and BlueBay Funds Management Co. SA were among the many asset managers holding Credit Suisse AT1 notes, according to data compiled by Bloomberg. Their holdings may have changed or been sold entirely since their last regulatory filings.

Pimco and BlueBay declined to comment when contacted by Bloomberg News on Friday, before the deal was announced. A spokeswoman for Invesco said that “due to portfolio disclosure policies, we wouldn’t disclose any current movements in portfolios but our investment teams are continuing to monitor developments and prudently managing our clients’ assets in light of current market conditions.”

The bonds were by Friday already trading at levels usually reserved for companies about to go bust. A slice of the bank’s $1.65 billion note, issued less than a year ago, changed hands at about 35 cents on the dollar, according to trade reporting system Trace.

Earlier on Sunday, pricing fluctuated as traders weighed two contrasting scenarios: either the regulator would nationalize part or the whole bank, possibly writing off Credit Suisse’s AT1 bonds entirely, or a UBS buyout with potentially no losses for bondholders.

The broader market for those risky European bank bonds, also known as contingent convertibles or CoCos, has also tumbled in the past two weeks, with the average AT1 now indicated at a price of just 82% of face value, one of the steepest discounts on record.