But, but, but they are safe they said. The yield is fantastic they said. They’ll never be converted they said. Mwahaha. Charlie McEliggott at Nomura
The complete write-down of Credit Suisse AT1’s / CoCo’s in light of the “restructuring” into UBS was the real plot-twist yesterday, particularly as equity holders actually received a small compensation, despite the capital structure assumptions of most that the credit was senior to equity (another lesson in reading the fine print of what you own—they’re called “Bail-In Bonds” for a reason).
AT1’s were CREATED to do just this after the last Euro banking crisis—a vehicle for banks to raise capital at times of stress via a callable security which offered higher yield due to its subordinated nature….but one which could absolutely take a hit on a bank failure and impose losses on creditors and avoid hitting taxpayers first.
But now ironically instead of helping to ABSORB and ISOLATE losses on the bank distress by acting an additional BUFFER of capital btwn shareholders and bondholders, the treatment of the AT1’s in this case actually then helped to SPREAD crisis contagion to the broader EUR banks through the sudden repricing the global $275B AT1 perpetual bond space:
Worth noting that when UBS was -16% at its max lows earlier (now just -4.4%) that UX1 / VIX front future pressed to 28 level for the first time since Nov ’22, iterating that ongoing “Short Convexity” problem which Dealers have in VIX upside CRITICALLY / awkwardly / embarrassingly, after seeing this initial negative market take on the treatment of AT1’s from the FINMA, we later then saw the EBA, the Single Resolution Board and the ECB Banking Authority release a statement “welcoming” the response by Swiss authorities to “ensure financial stability,” but then hilariously “pushing back” on the FINMA actions and doing the “jedi mind tricks” thing by somehow attempting to state that CET1 (common Equity instruments) are the first ones to absorb losses, “and only after their full use would Additional Tier One (AT1) be required to be written down,” too then stating that “Additional Tier 1 is and will remain an important component of the capital structure of European Banks”.
Oh, no, CoCos!
NAB’s economics team said convertible bank debt on issue in Europe fell 5 per cent to 15 per cent overnight as investors reacted to the fallout from the complete wipeout of holders of Credit Suisse’s additional tier 1 (AT1) notes, with a face value of $17 billion.
“That came as a surprise to most in that the notes came out worse off than the equity holders, who at least receive some UBS stock,” NAB said.
The minor yield uplift was never worth the risk of being bailed-in by a butterfly flapping its wings.