One section of Credit Suisse's bondholders is set to be wiped out following the struggling bank's takeover by UBS, causing them to see investments worth 16 billion Swiss francs ($17 billion) become worthless.
The Swiss regulator FINMA announced Sunday that the so-called additional tier-one bonds, one of many relatively risky 'investments', will be written to zero as part of the deal.
The move has angered Credit Suisse AT1 bondholders as their investments have seemingly been lost, while shareholders will receive payouts as part of the takeover. Usually, equity investments would be classed as secondary to AT1 bonds.
AT1 bonds, also known as contingent convertibles or "CoCos," are a type of debt that is considered part of a bank's regulatory capital. Holders can convert them into equity or write them down in certain situations – for example when a bank's capital ratio falls below a previously agreed threshold.
AT1s were created in the aftermath of the financial crisis as a way of shifting debt from one insolvent party to another party in crisis situations. Due to their elevated risk factor, they often have higher yields than other bonds.
After years of losses and difficulties, Credit Suisse's struggles came to a head last week after its biggest investor, Saudi National Bank, said it could not offer any more support to the Swiss bank financially due to regulatory restrictions. This came just days after the collapse of Silicon Valley Bank and Signature Bank in the US sent shock waves through the banking sector.
Credit Suisse’s stock has fallen to an all-time low amid all the melee as investors see the writing on the wall. The powers that be will continue to spew empty rhetoric about how everything is just fine, but investors and depositors are wisening up to the scam.
