"I would view it as a small, niche asset class ... I don't
think there's overlap between the two investor bases," he said.
(Reporting by Davide Barbuscia and Saeed Azhar; Editing by
Cynthia Osterman)
By Davide Barbuscia and Saeed Azhar
NEW YORK, March 20 (Reuters) - The decision by Swiss
authorities to wipe out Credit Suisse's Additional Tier 1 (AT1)
bonds could reduce demand for this type of bonds in the long
term, a Goldman Sachs strategist said, but risk of contagion
across credit markets was limited due to the relative niche
nature of the asset class.
Some $17 billion worth of AT1 Credit Suisse bonds will be
written down to zero on the orders of the Swiss regulator as
part of a rescue merger with UBS . Under the deal,
holders of Credit Suisse AT1 bonds will get nothing, while
shareholders, who usually rank below bondholders in terms of who
gets paid when a bank or company collapses, will receive $3.23
billion.
AT1 bonds issued by other European banks fell sharply on
Monday as the treatment of Credit Suisse AT1 bondholders
highlighted the risks of investing in this type of debt.
The sell-off was a "knee jerk reaction to an outcome that
took a lot of people by surprise," Lotfi Karoui, chief credit
strategist at Goldman Sachs, told Reuters.
But, he added: "In the long term, we are a little concerned
about the potential permanent destruction in demand ... I do
think that investors will have to re-assess how the risk-reward
looks like in those instruments, particularly at times of rising
financial distress."
AT1 bonds act as shock absorbers if a bank's capital levels
fall below a certain threshold. They can be converted into
equity or written off.
European regulators tried to stop the AT1 market rout on
Monday saying owners of this type of debt would only suffer
losses after shareholders have been wiped out - unlike what
happened at Credit Suisse. Meanwhile, law firm Quinn Emanuel
Urquhart & Sullivan said it was talking to a number of Credit
Suisse AT1 holders about possible legal action.
For Karoui, the risk that a re-assessment of the risk of
this type of securities could affect the performance of the
broader credit market remained limited due to the size of the
AT1 market and its investors.
He said AT1 bonds, excluding the Credit Suisse ones,
totalled about $100 billion in the dollar market and just over
70 billion in the euro market, against over $10 trillion of
investment grade bonds between the U.S. and Europe.
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