20th March 2023 – (Hong Kong) Credit Suisse has been ordered by the Swiss regulator, FINMA, to write off CHF16 billion (US$17.24 billion) of additional Tier 1 (AT1) debt to zero, as part of its merger with UBS. The move is aimed at bolstering the bank’s capital, and comes as authorities look to ensure that private investors share the pain of Credit Suisse’s troubles. The decision means that AT1 bondholders will apparently receive nothing, while shareholders will receive $3.23 billion under the UBS deal.
Chair Marlene Amstad said that FINMA had remained within Switzerland’s too-big-to-fail banking framework in making its decision. AT1 bonds are a form of junior debt that count towards regulatory capital for banks, and were designed as a way to transfer risks to investors and away from taxpayers in the event of a bank getting into trouble. The bonds can be converted into equity or written down when a lender’s capital buffers are eroded beyond a certain threshold.
The decision has left AT1 bondholders feeling aggrieved. “It’s stunning and hard to understand how they can reverse the hierarchy between AT1 holders and shareholders,” said Jerome Legras, head of research at Axiom Alternative Investments, which invests in Credit Suisse’s AT1 debt. The move by the Swiss regulator could make it more difficult for other lenders to raise new AT1 debt, according to investors.
AT1 bonds had sunk into distressed territory before the weekend due to mounting concerns over the health of the Swiss lender. Credit Suisse’s AT1 debt had rallied earlier on Sunday amid reports that shareholders would receive something in a deal with UBS, raising hopes that bondholders would be protected. The move by the Swiss regulator has implications for the wider market, making AT1 bonds more expensive for other banks going forward, as they carry more risk for investors than regular debt.
UBS CEO Ralph Hamers told analysts that the decision to write down the AT1 bonds to zero was taken by FINMA, so it would not create a liability for the bank. Prior to Sunday’s news, investors had been apprehensive about the prospect of banks extending outstanding AT1 bonds to avoid refinancing at worse terms because of higher interest rates.