Mar 20, 2023
Most Riskier Asia-Pacific Bank Bonds Rebound After Rout
(Bloomberg) -- Banks’ riskiest bonds advanced globally on Tuesday after panic subsided, and investors heeded regulators’ assurances that the wipeout in Credit Suisse Group AG’s Additional Tier 1 notes wouldn’t happen in their jurisdictions under similar circumstances.
AT1 from banks including Commerzbank AG, HSBC Holdings Plc and UniCredit SpA were among leading gainers following a recovery in Asia, where bonds including those from Westpac Banking Corp. were quoted higher. The notes have only recovered some of their losses. Perceived credit risk across the regions also fell.
“The fact that central banks and regulators in euro zone and UK came out and said ‘this is a Swiss decision and this is not the way in Europe,’ — this commitment on the AT1 asset class was important, it came quickly and it was good news,” said Erick Muller, head of product and investment strategy at Muzinich & Co. in London.
UK and European authorities sought to restore calm in markets by reiterating that AT1 bonds rank ahead of common equity in the capital structure. The asset class on Monday suffered its biggest loss on record, according to an index tracking European bonds, after a UBS Group AG takeover of Credit Suisse wrote down 16 billion francs ($17.3 billion) of the lender’s AT1s, even though shares weren’t wiped out entirely. The deal raised questions among investors about legal certainty in Switzerland.
Commerzbank’s €500 million ($538 million) 4.25% perpetual note was up about 6.8 cents to 71.27, according to pricing source CBBT, at 4:50 p.m. London, while UniCredit’s 3.875% AT1 bonds are up 7.2 cents to 67.4. In the US, HSBC Holdings Plc’s 8% perpetual CoCo bond rose 8 cents on the dollar to about 96.5. It echoes similar moves in Asia, where Westpac Banking Corp.’s perpetual bonds rose alongside those of AIA Group Ltd.
“Investor optimism was given a band aid assurance by EU and UK regulators, while corporates also rushed in to restore optimism,” said Jessica Amir, a market strategist at Saxo Capital Markets. “But concern still remains.”
For US banks, investors are largely shielded from the writedown pain because the big banks generally sell preferred equity, which counts as additional tier one capital but doesn’t have writedown or conversion-to-equity clauses, according to Arnold Kakuda, a bank analyst at Bloomberg Intelligence.
There’s a total of nearly $228 billion of institutional and retail preferreds from US banks. The securities have broadly been hit in recent weeks.
“In the US we are dealt with the double whammy of regional bank stress and the 100% write-off of Credit Suisse AT1s,” said Kakuda in a phone interview Tuesday. “The sentiment is it’s probably better to be more senior in the capital structure versus reaching for yields in this environment.”
Citigroup Inc. still sees a future for the AT1 market even after record price declines on Monday. The principal writedown language in the Credit Suisse AT1s is relatively unusual and features mostly in Swiss and emerging markets, according to Citi credit strategists led by Daniel Sorid. Banks in the EU, UK, and North America have the more common conversion language.
“We think that AT1s and other forms of hybrid capital should become costlier as the market reflects the equity-like downside risk,” the strategists wrote in a note on Monday.
AT1 bonds were introduced in Europe after the 2008 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. Credit Suisse’s write down is the biggest loss yet for Europe’s $275 billion AT1 market.
Credit Suisse’s AT1s are being quoted at just a few cents.
--With assistance from Ameya Karve, Hannah Benjamin-Cook, Beth Thomas, Ronan Martin, John Cheng and Diana Li.
(Updates with comment from US strategists from paragraph seven)
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