Another holder of the debt said they expected the AT1 bonds could be converted into UBS shares if a deal went through. Credit Suisse bonds plunged into distressed territory at or below 30 cents on the dollar this week as investors worried about the health of the bank even after the Swiss National Bank provided the lender with a $54 billion emergency loan. Protecting bondholders from losses would boost confidence across the financial industry, but a deal with UBS is just one potential outcome. If the takeover falls apart, Switzerland is considering taking over the bank in full or holding a significant equity stake, Bloomberg reported. (Reporting by John O'Donnell and Chiara Elisei; Additional reporting by Elisa Martinuzzi and Pablo Mayo Cerqueiro; Writing by Tommy Reggiori Wilkes; Editing by Paritosh Bansal and Hugh Lawson)
(Updates with bondholder quote, more details on bonds)
By John O'Donnell and Chiara Elisei
FRANKFURT/LONDON, March 19 (Reuters) - Swiss authorities
are examining imposing losses on Credit Suisse bondholders as part of a rescue of the bank, two sources with
knowledge of the matter said on Sunday.
However, European regulators are apprehensive about such a
move for fear that it could hit investor confidence elsewhere in
Europe's financial sector, the sources said, speaking on the
condition of anonymity.
A final decision, however, had not been taken and the terms
could still change, according to the sources.
Losses on bondholders may need to be larger if Credit Suisse
were wound down rather than if it were taken over by UBS, one of
the sources said. Authorities are trying to engineer a UBS
takeover of Credit Suisse before financial markets reopen on
Monday.
FINMA, the Swiss regulator, did not immediately respond to a
request for comment. Credit Suisse and UBS declined to comment.
Despite the prospect of losses, some bond investors on
Sunday were encouraged by a report in the Financial Times that
UBS had offered up to $1 billion to buy its rival, although
there is no guarantee a deal with UBS will be reached.
The price of one of Credit Suisse's Additional Tier 1 (AT1)
bonds, a junior tranche of debt which slumped in price this
week, rallied in limited trading after the report, one investor
said.
A $1 billion deal would mean Credit Suisse shareholders
getting a fraction of what their shares were worth on Friday.
But with bonds sitting above equity in the priority ladder
for repayment in a bankruptcy process, two investors said it
would be unlikely bondholders would take a hit if shareholders
get something.
"I would be surprised if Credit Suisse bondholders,
including AT1 investors, weren’t made whole. As long as UBS pays
something to equity investors, bondholders should be left
untouched," Jerome Legras, head of research at Axiom Alternative
Investments, an investor in Credit Suisse’s AT1 debt, told
Reuters.
AT1 bonds are designed to turn into equity if a bank's
capital is depleted to help prop up the bank.
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