UBS’ purchase of Credit Suisse rattles the AT1 bond market

22 Mar 2023 , 12:46 PM

The agreement of UBS’ purchase of Credit Suisse includes the term of writing down $17 billion of Additional Tier 1 (AT1) bonds that Credit Suisse sold to investors. Bond holders of AT1 bonds are meant to take the loss once shareholders’ capital has been wiped out. In this case, AT1 bond holders have taken the loss before the shareholders of Credit Suisse took it. 

UBS has bought Credit Suisse for $ 3.2 billion. Shareholders of Credit Suisse will get 1 share of UBS for every 22.48 shares of Credit Suisse that they hold. So shareholders of Credit Suisse did not see their wealth getting wiped out completely from the bank’s failure. But AT1 bond holders are seeing their wealth getting wiped out completely. 

This is causing much consternation not just among the AT1 bond holders of Credit Suisse, but also among AT1 bond holders of other banks. Prices of AT1 bonds fell sharply after the details of the UBS purchase deal came out.  A sell-off resulted in AT1 bonds. According to data from The Economist, the  price of AT1 bonds of Deutsche Bank fell by more than 9.5% on March 20^th.

In India, AT1 bond holders of Yes Bank faced a similar fate some years ago when the bank came under trouble. Rs 8,300 crore of AT1 bonds were written off from the balance sheet of the bank to reduce its liabilities and save it. This decision to write off these bonds was recently set aside by the Bombay High Court. The matter is now in Supreme Court. It will be heard next by the Court on March 28^th. 

The rule is that losses will be first borne by shareholders, then by AT1 bondholders, and then by other bondholders.  In the case of Credit Suisse, there was a term in its AT1 bonds contract that said that in the case of a write-down event, AT1 bond holders will have no right to reimbursement. But this term violates the essential definition of AT1 bonds – that they come after equity in terms of taking the losses in the event of a write-down or bank failure.