Credit Suisse wipe out may have ‘destroyed’ AT1 bond market, but Asia-Pacific protected by more supportive authorities
- Credit Suisse’s order of loss absorption is ‘definitely wrong, and broke the rules in the capital market’, Neuberger Berman executive says
- Asia-Pacific market on the lookout for contagion risks
The wipe out of Credit Suisse’s riskiest bonds is expected to continue to weigh on the more than US$250 billion Additional Tier-1 (AT1) bond segment and threaten an important funding channel for banks, as investors question the viability of these securities as an investment asset, analysts said.
And while the repercussions for banks in Asia-Pacific are currently being viewed as controllable, given the fact that local authorities are “more friendly” towards bondholders, the market is still watching out for contagion risks.
AT1 notes are debt securities created after the 2008 financial crisis aimed at making bondholders absorb losses to allow a bank to stay afloat, while reducing the chance of bailouts using taxpayers’ money. These risky bonds are also called “contingent convertibles” or “CoCos”, as they can be converted into equity of a failing bank, or written down to zero.
Credit Suisse bids farewell to investors with Hong Kong-style stalls
The order of loss absorption is “definitely wrong, and broke the rules in the capital market”, said Peter Ru, managing director and China fixed-income strategy leader at Neuberger Berman based in Shanghai. “The government intervention was too severe and has destroyed the AT1 market.”
“It will cause more problems such as fund losses … and trigger many lawsuits,” he said, adding that risk-based pricing of AT1 notes had changed after the incident, but the impact on markets in China and Asia was smaller.
02:30
Silicon Valley Bank collapse stuns tech firms around the world, global operations dismantled
All 38 AT1 bonds but one issued by Asia-Pacific banks rebounded on Tuesday morning, according to Bloomberg data. An Index tracking AT1 bonds issued by Asian banks fell 1.4 per cent on Monday to its lowest level since December 12, according to BofA ICE Index.
Market participants are, however, still reassessing risks in the AT1 segment, as some foresee more funds – such as Credit Suisse AT1 creditors PIMCO and Invesco – suffering losses, especially if client redemptions jump.
Thousands of jobs at risk as UBS seeks to absorb Credit Suisse after rescue
“If the banking crisis spreads further, more fund managers or investors of AT1 instruments may suffer more losses, as the repricing continues to take place,” said Augus To, deputy head of research at ICBC International in Hong Kong. Given the possible rise in lawsuits against Credit Suisse, “the longer term implication of the event remains unclear as it is still unfolding”.
Prioritising shareholders over creditors is not new. It occurred in the case of Yes Bank in India in 2020 and at Banco Popular in Spain in 2017, according to analysts.
The Credit Suisse AT1 wipeout “is technically not illegal”, Nomura analyst Nicholas Yap said in a note on Monday. “Nevertheless, the decision clearly does not respect a bank’s hierarchy of claims and, at least from an investor perspective, calls into question the viability of AT1s as an asset class.”
2023 will not turn into a repeat of 2008 crisis, Hong Kong SFC says
Most Asian authorities, especially those in Korea and Hong Kong, “are likely to adopt a more bondholder-friendly approach if a similar situation arises in Asia”, Yap said. But Australia might be an exception, as its regulators discouraged banks and insurers from calling in their AT1s and replacing them with costlier instruments.
CreditSights, a unit under Fitch Group, viewed the write-down by Credit Suisse and the Swiss authorities as “short-sighted”. In a separate report on Monday, CreditSights said Asia-Pacific was “less likely to see capital security investors seeing losses among this set”, as authorities are more supportive of their financial institutions in South Korea, Japan and China.
It also foresees risk-off sentiment in the Asia-Pacific AT1 market dragging on for at least several weeks, especially with regard to banks such as Bank of East Asia and Citic Bank International, due to caution about their business models with outstanding AT1 bonds.
