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Credit Suisse’s AT1 wiped out but equity holders to receive UBS shares

Goola Warden
Goola Warden • 5 min read
Credit Suisse’s AT1 wiped out but equity holders to receive UBS shares
In the Credit Suisse crisis, this is why equity holders are partially saved while bondholders get nothing
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As part of the rescue package for Credit Suisse as directed by the Swiss National Bank (SNB) and the Swiss Financial Market Authority (FINMA), all of Credit Suisse’s additional tier 1 (AT1) capital of CHF16 billion will be written down completely.

“On Sunday (March 19), Credit Suisse has been informed by FINMA that FINMA has determined that Credit Suisse’s Additional Tier 1 Capital (deriving from the issuance of Tier 1 Capital Notes) in the aggregate nominal amount of approximately CHF16 billion will be written off to zero,” a Credit Suisse press release states.

Credit Suisse and UBS entered into a merger agreement on March 19 following the intervention of the Swiss Federal Department of Finance, SNB and FINMA. UBS will be the surviving entity upon closing of the merger transaction. Under the terms of the merger agreement all shareholders of Credit Suisse will receive 1 share in UBS for 22.48 shares in Credit Suisse.

“Pursuant to the emergency ordinance which is being issued by the Swiss Federal Council, the merger can be implemented without approval of the shareholders,” the Credit Suisse statement adds.

Under Basel III regulations there is a point of non-viability (PoNV) before taxpayers are exposed to loss. Banks have differently “graded” types of capital, CET1, AT1, and tier 2 instruments.

The PoNV condition requires all AT1 and Tier 2 instruments to be capable of being converted into common equity or written off. (Singapore banks have also issued AT1 perpetual securities and Tier 2 bonds.) The trigger for the conversion or write-off is the earlier of (i) a decision of the relevant authority that the conversion/write-off is necessary, given that the bank is assessed to be non-viable; and (ii) a decision to inject public funds to prevent the bank’s failure. (AT1 is a bail-in instrument. Bail-in instruments are the opposite of bailout which means they impose losses.)

In Credit Suisse’s case, FINMA has determined the write-off. Note though, that when these instruments such as perpetual securities and perpetual contingent convertible (coco) bonds are issued, they are issued as loss-absorbing and these are announced during issuance. (This is one of the subtle differences between the perpetual securities issued by the banks, and those issued by REITs. There are other differences.)

Some market watchers were surprised by the FINMA directive as the previous occasion when AT1 was written off was when Banco Santander acquired Banco Popular (in 2018). Here Banco Popular’s equity and AT1 were wiped out.

“We admit this development has come as a surprise. We expected a more balanced outcome with Swiss Financial Sector stability preserved with the continuation of at least the domestic franchise of CS, a possible strategic sell off of the asset management and wealth management businesses and the run-down of its higher risk investment bank. We further expected with the “no creditor worse off” principle that equity holders would bear the brunt of write-downs first in any resolution type scenario, and CS’s current capital position providing a buffer against an adverse scenario,” says OCBC Credit Research.

See also: MAS fines Credit Suisse $3.9 mil for misconduct by its relationship managers

Under the Swiss Banking Act, FINMA has the authority to approve a restructuring plan of a systemically important bank without consulting creditors (and shareholders) beforehand in order to protect financial stability so that they (creditors and shareholders) cannot block the restructuring plan in the context of the “no creditor worse off” principle.

“Shareholders and creditors can appeal against the restructuring plan with the Swiss Federal Administrative Tribunal with the outcome being compensation rather than a delay in the restructuring plan,” OCBC Credit Research observes.

In June 2019, Credit Suisse issued $750 million of 5-year contingent write-down capital notes in Singapore. Based on the announcement back then, 91% went to Singapore investors, 7% to rest of Asia, and 2% to Europeans. By investor type, private banks were allocated 84%, fund managers 10%, banks 4% and insurers 2%.

In a statement, a UOB spokesperson says, ““UOB has no exposure to Credit Suisse bonds. UOB bond holdings consist of high quality liquid assets and are held primarily for regulatory requirements.” A spokesperson for DBS says “DBS' exposure to Credit Suisse's AT1 bonds is insignificant." Similarly, an OCBC spokesperson says OCBC’s exposure is also insignificant.

The Monetary Authority of Singapore says Credit Suisse’s customers in Singapore will continue to have full access to their accounts. The bank’s contracts with counterparties will still remain in force. The takeover is not expected to impact the stability of Singapore’s banking system.

For now, Credit Suisse’s other entities in Singapore – Credit Suisse Securities (Singapore) Pte Ltd and Credit Suisse Trust Limited – will continue to operate under their respective licenses.

“MAS will remain in close contact with FINMA, Credit Suisse and UBS as the takeover is executed, to facilitate an orderly transition, including addressing any impact on employment,,” the MAS statement says.

“MAS will continue to closely monitor the domestic financial system and international developments, and stands ready to provide liquidity through its suite of facilities to ensure that Singapore’s financial system remains stable and financial markets continue to function in an orderly manner,” MAS adds.

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