Banks: Credit Suisse rescue can’t calm banking market bonds cause turmoil

The devaluation of risk bonds during the acquisition of the Swiss bank is putting pressure on the banking market. HSBC bonds, in particular, are falling.

03/20/2023 | Update: 03/20/2023 – 7:47 am

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Dusseldorf In light of the emergency takeover of Credit Suisse, which was accompanied by a devaluation of the institute’s AT1 risk bonds, there was a sell-off in the bank’s shares in Asian stock trading on Monday.

Shares in HSBC were particularly under pressure, falling as much as 6.6% and therefore more strongly than they had in nearly six months. The bank’s AT1 bonds are down more than five cents. Standard Chartered fell 5.6 percent. Hong Kong’s Hang Seng Index fell 2.7 percent. Deutsche Bank’s exposure to Credit Suisse AT1 bonds is “close to zero”, Germany’s biggest bank announced on Monday.

After UBS’s takeover of Credit Suisse on Sunday night, it became known that investors in certain equity-type bonds, the so-called Additional Tier 1 (AT-1) bonds, were losing their stake. Papers with a face value of CHF 16 billion are reduced to zero.

AT-1 bonds were invented after the 2007/08 financial crisis to serve as a buffer in a crisis and to prevent banks from rapidly collapsing.

Marvin Chen, an analyst at Bloomberg Intelligence, said: “The Credit Suisse deal resulted in significant losses for some bondholders and investors in the region are likely to reassess their exposure to financial market turmoil and risk.”

Investors are now trying to find out how much exposure other banks have to these securities. In an analysis, Vital Knowledge explained that the acquisition of Credit Suisse by UBS will make the overall system stronger and more stable. For holders of AT1 bonds from other banks, however, the devaluation could raise fears.

The write-down is the biggest so far in paper of its kind, which represents a market of around 250 billion euros in Europe. So far, AT1 bonds have only been written off once in 2017, when Spain’s Banco Popular was acquired by Banco Santander for one euro. However, the loss of EUR 1.35 billion in AT1 bonds was accompanied by the total write-off of equity.

As a rule, shareholders are the first to have their capital exhausted before the bondholders’ turn. Credit Suisse also emphasized this point in a presentation to investors earlier this week. Therefore, the announcement comes as a surprise to many market participants.

According to Patrik Kauffmann, portfolio manager at Aquila Asset Management AG, AT1 holders should have been named before shareholders. “Seniority in the capital structure must be respected.”

John McClain, portfolio manager at Brandywine Global Investment Management, points out that bondholders knew they were investing in high-yield risk.

“It’s absolutely right to prevent moral hazard from seeping into this part of the market,” he said. “These bows were made for moments like this. Similar to catastrophe titles.”