The rudest shock in the rushed deal to save embattled Swiss lender Credit Suisse Group was reserved for the holders of the bank’s riskiest tranche of bonds.
Not only did they discover they are the only investors not getting any compensation but that the long-established practice of giving bondholders priority over shareholders in debt recovery had been turned on its head.
That shock rippled through Asian markets on Monday, March 20, causing bank credit default swaps to widen and stocks to fall. MSCI’s world bank stock index stood at 84, down from 100 in two weeks. European bank shares and bonds slid as traders repriced the risk and cost of banks’ capital. “What the market is saying today, is that between now and maturity there’s a risk on this debt which hadn’t been priced correctly in light of what’s happening in banks in the US and around the world.”
“People have been scrambling through the weekend to think all of this out. It’ll be difficult for new issues to get down when you have a big widening out of spreads, with AT1s leading the way.” The AT1 bonds, which also carry a higher coupon, can be converted into equity or written down when a lender’s capital buffers are eroded beyond a certain threshold.
“We think this is quite negative for AT1 and broader TLAC securities worldwide as it highlighted the inherent risks present in these instruments,” Deutsche Bank analysts said in a note.
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