The buildings of the Swiss banks UBS and Credit Suisse are seen at Paradeplatz in Zurich, Switzerland. , Photo Credit: Dennis Balibous
European bank bonds fell after a fall on Monday State-backed rescue of Credit Suisse by UBS Concerns about broader bank capital grew as some bondholders were liquidated, and bank stocks declined.
The handling of the Credit Suisse rescue by Swiss authorities has led to an understanding in the bond market that shareholders would suffer bigger losses than bond investors in such a scenario.
Under the rescue deal, 16 billion Swiss francs worth of Credit Suisse’s bonds, known as Additional Tier 1 (AT1) debt or CoCos (Contingent Convertibles), will be voided on orders from the Swiss regulator as part of the merger. would be written off as UBS, a decision that stunned bondholders.
AT1 bonds – a $275 billion sector also known as “contingent convertible” or “Coco” bonds – can be converted to equity or closed if a bank’s capital level falls below a certain threshold. comes
The zero-to-zero write-down $275 billion at Credit Suisse will be the biggest ever in the AT1 market, dwarfing Spain’s Banco Popular’s 1.35 billion euros ($1.44 billion) bondholders in 2017.
“The acquisition of Credit Suisse by UBS was swift and should have assured the market that we did not have another bank collapse. However, what it has done is highlight the issues surrounding the AT1 bonds,” Ross said. Mould, said director of investments at AJ Bell.
AT1 bonds are a form of deeply subordinated debt that converts to equity or is written down when a bank’s capital levels fall below a certain threshold, depending on the terms of each individual instrument.
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European lenders’ credit default swaps – instruments used to insure against the risk of default – boomed in the banking sector.
In the bond market, quotes for Credit Suisse’s Additional Tier 1 (AT1) bonds were as low as 1 cent on the dollar on Monday as investors wiped out.
AT1 bonds among other banks fell as Credit Suisse’s wipeout raised concerns about investment in such debt issued by other banks.
European supervisors on Monday tried to prevent a blockage in the market for convertible bank bonds, saying owners of this type of debt would suffer losses only after shareholders are wiped out.
Bid prices on AT1 bonds from banks including Deutsche Bank, HSBC, UBS and BNP Paribas fell 9-12 points on Monday, data from Tradeweb showed.
A UBS AT1 bond that is callable in January 2024 was trading at a yield of about 29%, up from 12% on Friday, indicating how much more expensive such debt can be.
“The typical CS situation has now mostly subsided, but this is no time for complacency,” said Wolfgang Felix, senior analyst at credit firm Sarria Ltd. “CoCos are down across the board this morning as investors realize that these bonds contract the concept of absolute priority to their own detriment.”
“So the crowd is angry and scared and looking for the next best target. Attention is shifting to other issuers of CoCos, including most of the big banks in Europe. This is not a good situation.”
Funds tracking AT1 debt also declined sharply.
Invesco’s AT1 Capital Bond Exchange-Traded Fund was last down 9%, while WisdomTree’s AT1 CoCo Bond ETF was indicated to be down 7%.
Shares in Credit Suisse plunged 64.5% while those of UBS Group fell 16%.
Shares of the bank then pared some losses throughout the morning and were down 1.4% by 1106 GMT.
European banking indices have plunged nearly 18% this month after the recent failure of several regional US banks, starting with Silicon Valley Bank, triggered a widespread selloff in bank stocks.
The uncertainty was also reflected in the rising cost of insuring the credit risk of other banks in the credit default swap (CDS) market.
UBS CDS increased 63 basis points to 180 bps — a level last seen more than a decade ago. S&P Global Market Intelligence data showed that among other lenders, Deutsche Bank and Unicredit saw the fastest growth of 20 bps and 13 bps, respectively.