A few hours ago, UBS, one of the largest banks in Switzerland agreed to buy its competitor, Credit Suisse for 3.25 billion dollars in a historic deal that might have rescued the global banking system from a 2008-like meltdown. Even as shareholders and various other stakeholders of credit Suisse managed to avert a complete loss, bondholders of Credit Suisse AT1 bonds, has lost everything, literally everything.
According to reports, the nominal value of all AT1 bonds issued by Credit Suisse will be written down to zero. And this means that investors who had invested nearly 17 billion dollars in the AT1 bonds of credit Suisse will end up getting nothing by the time UBS completes the acquisition of Credit Suisse.
What are AT1 bonds?
AT1 bonds are high-risk bonds that are issued by institutions to raise capital. These bonds were introduced into the financial market after the financial crisis in 2008.
The specialty of these AT1 bonds is that, in the event of a financial crisis faced by the bond-issuing institution, the bonds can either be converted to equity or completely written down to zero. This is what makes AT1 bonds different from other types of bonds.
As the risk factor is higher than the normal bonds, AT1 bonds have high returns and are seen as good investment opportunities by investors with higher risk appetites.
What happened to AT1 bondholders of Credit Suisse?
Credit Suisse, a multinational investment bank based in Switzerland has been facing immense financial pressure for the past few months as it lost a large number of customers and depositors withdrew their deposits from the bank. Lawsuits and legal actions faced by the bank in connection to various scandals and human trafficking cases along with macroeconomic conditions around the globe pushed the bank into a financial crisis.
As the market price of its stock plunged to an all-time, the bank and the Swiss government started looking for a buyer who can acquire the bank. At last, after several meetings and deliberations, UBS agreed to buy Credit Suisse. UBS demanded financial support from the Swiss government to cover the losses of Credit Suisse which will be acquired by UBS.
Due to the significant involvement of the government in the whole transaction between credit Suisse and UBS, it is part of the law that AT1 bonds should either be written down to zero or should be converted to equity.
On Sunday, the Swiss Financial Market Supervisory Authority said that “The extraordinary government support will trigger a complete write-down of the nominal value of all AT1 shares of Credit Suisse in the amount of around 16 billion [Swiss francs],”
Usually, when a bank suffers bankruptcy and is moved to liquidation, bondholders get priority over shareholders in sharing the returns from the sale of bank assets. But in this case, shareholders of Credit Suisse will get shares of UBS and AT1 bondholders will get nothing at all.
It is also important to note that in the case of credit Suisse, instead of bankruptcy or liquidation, it was an acquisition with government support that triggered the “write down” clause of AT1 bonds.