Why are markets buzzing over the risky bank bond known as AT1? | – #markets #buzzing #risky #bank #bond #AT1
LONDON, March 24 (Reuters) – Known as Additional Tier 1 or AT1 debt, 16 billion Swiss franc (17.5 billion dollars) Financial markets were thrown a new curve ball by the decision to write down Credit Suisse bonds to zero as part. with UBS (UBSG.S). mandatory rescue combination.
Under the deal, holders of Credit Suisse AT1 bonds will get nothing, bank or shareholders, who are usually below bondholders in terms of who gets paid when the company breaks up, 3.23 billion dollars they will get
This news other Europe hit AT1 bonds issued by their banks and they faced fresh selling pressure on Friday.
Here are some of the implications of the Credit Suisse AT1 bond write-off.
WHAT IS AT1 BOND?
AT1 bonds — a $275 billion sector, also known as “contingent convertible” or “CoCo” bonds — act as shock absorbers if a bank’s capital levels fall below a certain threshold. They can be capitalized or written off.
They form part of the capital cushion that regulators require banks to keep to support them during market turmoil.
They are the riskiest type of bond a bank can issue and therefore carry a higher coupon.
If AT1s are converted into equity, it supports the bank’s balance sheet and helps it stay afloat. They also “collateralize” or transfer risks to investors if banks run into trouble, and tax paves the way to alienate the payers.
WHAT HAPPENED TO CREDIT SUISSE AT1S?
AT1s rank higher than shares in the bank’s capital structure. If bank if it goes into trouble, bondholders will have an advantage over shareholders in terms of getting their money back.
In Switzerland, the terms of the bonds state that the financial regulator has no obligation to adhere to the traditional capital structure during the restructuring, so bondholders lose out in the case of Credit Suisse.
Therefore, Credit Suisse AT1 owners no compensation are the only ones who don’t get it. Under the bailout deal, they rank lower than the bank’s shareholders, who will receive at least 0.76 Swiss francs ($0.8191) per UBS share. USA dollars) can receive the purchase price.
WHO IS HIGHER RANKING?
Europe regulators told shareholders on Monday that they would continue to charge losses to bondholders.
Separately, the Bank of England also said that in Britain there is a clear legal order for shareholders and creditors of failed banks to suffer, with AT1 instruments ranking ahead of other equity instruments and behind subordinated bonds.
The central banks of Hong Kong and Singapore said on Wednesday that if bank if they fail in their jurisdiction, they will stick to the traditional hierarchy of creditor claims.
It is not the first time that the treatment of AT1 bonds in the overhaul of the bank has caused controversy. 20 after the Reserve Bank of India initiated restructuring of the lender20The dispute over the write-off of nearly $1 billion of AT1 bonds issued by India’s Yes Bank ( YESB.NS ) in March court is subject to proceedings.
WHAT DOES THIS MEAN FOR INVESTORS?
Fixed income investors were shocked by Credit Suisse’s AT1 debt downgrade.
A banking consultant and bond investor said the Swiss government’s actions were legal because the type of AT1 bonds issued by Credit Suisse could be fully written off.
But the price of AT1 bonds from other banks fell as investors panicked that their bonds, which are meant to provide more protection than stocks, could suffer the same fate.
Credit Suisse’s AT1 bondholders seek legal advice.
WHAT DOES THIS MEAN FOR THE WIDER MARKET?
Credit Suisse’s decision to downgrade AT1 bonds is considered negative for the AT1 bond market globally.
Standard Charted ( STAN.L ) chief executive Bill Winters said the move had “profound” implications for global banking regulations.
Analysts believe that investors will be more cautious about buying AT1 bonds in the future, which will make it difficult for banks that need to raise money in bond markets to meet regulatory requirements.
On AT1 bonds from banks including Deutsche Bank, HSBC, UBS and BNP Paribas offer prices This week, earnings have risen sharply, according to Tradeweb.
Germany’s Deutsche Pfandbriefbank ( PBBG.DE ) said it would not redeem its 300 million euro AT1 bond when its call option expires on April 28, while Aareal Bank ( ARLG.DE ) said it was unlikely to call its bond, although the decision was not final. received yet.
Reporting by Amanda Cooper, Dhara Ranasinghe, Virgina Furness, Amy-Jo Crowley, Nell Mackenzie, Yoruk Bahceli, Chiara Elisei and Karin Strohecker; Written by Amanda Cooper and Dhara Ranasinghe; Edited by Jane Merriman, Kirsten Donovan
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2023-03-24 17:19:41
Source – reuters
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