The bonds can be converted into equity or written down
when a lender's capital buffers are eroded beyond a certain
threshold.
"It's stunning and hard to understand how they can reverse
the hierarchy between AT1 holders and shareholders," said Jerome
Legras, head of research at Axiom Alternative Investments, an
investor in Credit Suisse's AT1 debt.
Reuters reported earlier on Sunday that Swiss authorities
were considering imposing losses on bondholders as part of the
rescue deal.
UBS' CEO Ralph Hamers told analysts that the decision to
write down the AT1 bonds to zero was taken by FINMA, so it would
not create a liability for the bank.
Credit Suisse's AT1 debt had rallied earlier on Sunday amid
reports that shareholders would receive something in a deal with
UBS, raising hopes that bondholders would be protected.
The bonds had sunk into distressed territory before the
weekend due to mounting concerns over the health of the Swiss
lender.
The move by the Swiss regulator could make it harder for
other lenders to raise new AT1 debt, investors said.
"It's going to make the AT1 bonds more expensive for all the
other banks going forward, because now everyone else is going to
see this extra risk," said Michael Ashley Schulman, partner and
chief investment officer at Running Point Capital Advisors.
AT1s pay higher interest as they carry more risk for
investors than regular debt.
Prior to Sunday's news, investors had been apprehensive
about the prospect of banks extending outstanding AT1 bonds to
avoid refinancing at worse terms because of higher interest
rates.
($1 = 0.9280 Swiss francs)
(Reporting by Pablo Mayo Cerqueiro and Chiara Elisei and Davide
Barbuscia; Additional reporting by Saeed Azhar in New York and
John O'Donnell and Noele Illien in Zurich; Writing by Tommy
Reggiori Wilkes;
Editing by Hugh Lawson and Diane Craft)
(Adds investor quote, UBS CEO comment, details and context)
By Pablo Mayo Cerqueiro, Chiara Elisei and Davide Barbuscia
LONDON/NEW YORK, March 19 (Reuters) - Credit Suisse said
16 billion Swiss francs ($17.24 billion) of its Additional Tier
1 debt will be written down to zero on the orders of the Swiss
regulator as part of its rescue merger with UBS ,
angering bondholders on Sunday.
FINMA, the Swiss regulator, said the decision would
bolster the bank's capital. The move reflects authorities'
desire to see private investors share the pain from Credit
Suisse's troubles.
Chair Marlene Amstad said FINMA had stuck to the
country's "too-big-to-fail" banking framework in making the
decision.
It means AT1 bondholders appear to be left with nothing
while shareholders, who sit below bonds in the priority ladder
for repayment in a bankruptcy process, will receive $3.23
billion under the UBS deal.
Engineered in the wake of the global financial crisis,
AT1 bonds are a form of junior debt that counts towards banks'
regulatory capital. They were designed as a way to transfer
risks to investors and away from taxpayers if a bank gets into
trouble.
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