Mar 19, 2023
Riskiest Bonds for Some Asian Banks Fall by Record on Credit Suisse Deal
(Bloomberg) -- The riskiest bonds of European lenders are plunging after holders of Credit Suisse Group AG’s contingent convertible securities suffered a historic loss as part of its takeover by UBS Group AG.
Perpetual notes issued by Deutsche Bank AG, Unicaja Banco SA, Raiffeisen Bank International and BNP Paribas SA all dropped by more than 10 points on Monday. Deutsche Bank’s £650 million ($792 million) 7.125% note dropped as much as 17 pence to about 64, its biggest-ever one-day decline. Most other European lenders’ Additional Tier 1 (AT1) notes fell to record lows.
The moves follow the wipeout of 16 billion francs ($17.3 billion) of Credit Suisse’s riskiest bonds after UBS agreed to buy the bank in a historic, government-brokered deal aimed at containing a crisis of confidence that had started to spread across global financial markets. It’s the biggest loss yet for Europe’s AT1 market, which was created after the financial crisis to ensure losses would be borne by investors not taxpayers.
See also: Why $17 Billion in Credit Suisse ‘CoCos’ Got Erased: QuickTake
In a typical writedown scenario, shareholders are the first to take a hit before AT1 bonds face losses, as Credit Suisse also guided in a presentation to investors recently. That’s why the decision to write down the bank’s riskiest debt — rather than its shareholders — has provoked a furious response from some of the bondholders.
“This just makes no sense,” said Patrik Kauffmann, a fixed-income portfolio manager at Aquila Asset Management, who holds Credit Suisse CoCos. “Shareholders should get zero” because “it’s crystal clear that AT1s are senior to stocks.”
European regulators reiterated on Monday that equities should take losses before any bonds. And, according to analysts at Bloomberg Intelligence, AT1 bonds at most other banks in Europe and the UK have more protections. Only the AT1s of Credit Suisse and UBS have language in their terms that allows for a permanent write-down, senior credit analyst Jeroen Julius said.
Still, the statement from European regulators failed to lift lenders’ AT1s from their slump, with nerves on edge about the future of the $275 billion CoCo market.
“The Swiss didn’t respect the bank creditor hierarchy,” said Suvi Platerink Kosonen, banking credit analyst at ING Groep NV. “The EBA/ECB statement is helpful for sure and necessary, but unlikely to remove all the uncertainty from these spooked markets.”
One UK bank CEO speaking earlier, who asked not to be named because the situation is sensitive, said the Swiss regulator’s decision to wipe out the notes may have effectively killed the market off. UK banks including Lloyds Banking Group Plc and Barclays have CoCos callable in the next few years.
UK lenders “have sizeable blocks of AT1 with first call dates in the next three years - will they seek to refinance whatever the cost, ignore call dates or at the extreme, replace the capital with equity?” said Jonathan Pierce, a banks analyst at Numis. “The market seems to be pricing bonds on the assumption that these instruments will not be called at first call dates.”
Focus also turned to other notes in Credit Suisse’s capital stack. The lender has a rare tier 2 contingent convertible note due later this year, which includes some characteristics in common with AT1 bonds but is actually counted as tier 2 capital instead.
“The bond will not be written down, so it will presumably remain an obligation of the enlarged UBS, alongside Credit Suisse’s senior bonds,” Simon Adamson, CreditSights’ head of global financials research, wrote in a note to clients.
Meanwhile, default swaps insuring UBS Group AG’s debt spiked this morning. The Swiss lender’s one-year CDS jumped 50 basis points to 148 basis points, according to pricing source CMAI as of 10:30am London time.
Risky bank bonds also tumbled in Asia, with some posting record declines. The retreat was most pronounced in bonds designed to be among the first to face writedowns if an institution gets into trouble. Bank of East Asia Ltd.’s 5.825% perpetual dollar note slumped 9.4 cents on the dollar to about 80 cents, data compiled by Bloomberg show.
--With assistance from Harry Suhartono, Ronan Martin, Tasos Vossos, Neil Callanan, Priscila Azevedo Rocha, Colin Keatinge, Giulia Morpurgo and Abhinav Ramnarayan.
(Updates prices and adds comments throughout, adds details on Credit Suisse’s Tier 2 CoCo.)
©2023 Bloomberg L.P.