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Is it permissible to make holders of CS bonds worse off than shareholders? Everything about the debate on the capital market.
Why is? The forced takeover of Credit Suisse by UBS has attracted a lot of attention around the world. The most hotly debated issue on the capital market is whether it is permissible to make holders of CS bonds worse off than holders of CS shares. The decision caused resentment because the hierarchy was different until now: It is common practice for owners of shares to lose their money first – and only then for the owners of bonds. This principle is now being turned on its head at Credit Suisse.
Which bonds are now a total default? CS shareholders will receive around 76 centimes per share in the form of UBS shares. On the other hand, there is a special category of bonds, the so-called Additional Tier 1 bonds (AT1). In this category, CHF 16.2 billion will be written off as part of the CS takeover. This means that UBS does not assume this debt – the owners of these AT1 bonds actually get nothing. Now they’re outraged because normally, in a bankruptcy, stockholders lose everything first — before bondholders.
Are holders of these particular bonds right to get upset? No. For one thing, CS is not a bankruptcy case. It is bought out by UBS. But more importantly, the prospectus for these special AT1 bonds clearly states that, in an emergency, the Swiss Financial Market Supervisory Authority Finma has the right to proceed as it does: namely to write off these AT1 bonds. Even if the shareholders still get something.
Legend:
Finma keeps the prospectus, i.e. the legal documentation for the bonds, and acts absolutely legally.
Keystone/Gaetan Bally
There is even another clause in the prospectus of these bonds that you could invoke. Namely those that the bonds can expire if the public sector helps with a rescue.
Have there been other instances in history where shareholders have fared better than bondholders? These special bonds are relatively new. It was created after the financial crisis to shift the risk of default away from taxpayers and onto the capital market. AT1 bonds are something like a cross between debt and equity. There was a first default of such papers in 2017 when the Spanish bank Banco Popular went bankrupt. At that time, however, the bank’s shareholders also lost their money completely. In that sense, the CS-AT1 bond write-off is a first.
Legend:
In view of its impending insolvency, the Spanish bank was taken over by Banco Santander in 2017 for the symbolic price of one euro and restructured.
Reuters/Susana Vera
Who owns these special bonds anyway? These AT1 bonds are in the hands of professional investors, hedge funds, investment companies and family offices. The latter serve to manage the family assets. These pros know that AT1 bonds are very risky. They also let themselves be paid royally for it: CS paid up to 9.5 percent interest on these papers, which was horrendous.
Legend:
It is now possible that these instruments – these hybrids between equity and debt capital – will lose popularity among professional investors in the future.
Keystone/AP/Andy Wong
What are the bigger implications for the market? On Monday, funds containing such special bonds lost value worldwide. There are around $260 billion of such AT1 bonds outstanding. Holders of these bonds are alarmed because they are reminded that although they get a lot of interest for these AT1 bonds, they also take on a lot of risk in return – and that one should also read the small print in the prospectuses.
Legend:
KEYSTONE/Michael Buholzer
The major bank Credit Suisse is taken over by UBS. The latest developments relating to CS and the current banking crisis in Switzerland as well as reactions and assessments can be found here.