By Herbert Lash
NEW YORK, March 21 (Reuters) - One of the largest
investors of the Credit Suisse bonds that were wiped out in the
UBS takeover of the troubled Swiss bank still believes in the
value of the debt class and the "bail-in" system designed to
save banks seen as too big to fail.
Spectrum Asset Management Inc on Monday said it liquidated
all its Credit Suisse positions during late market trading on
Saturday before the contingent convertible debt, called CoCos
among traders, were written down to zero in the UBS deal.
Bail-ins were included in the Dodd-Frank Act to protect U.S.
taxpayers after the collapse of Lehman Brothers in 2008 so that
they would not bear the cost of a bailout. Now banks in
difficulty will be bailed in by the holders of CoCos, formerly
known as Additional Tier 1 bonds (AT1).
"Anybody that bought CoCos who didn't think 'bailed-in' had
their head in the sand. Nobody likes it when it happens, but
that's the whole idea behind CoCos," Philip Jacoby, chief
investment officer at Spectrum, told Reuters.
"It's painful and it bleeds out to the entire system and
that's what happened. The bail-in worked," he said, adding that
the integrity of the financial system overrode everything else.
The firm's exposure to Credit Suisse AT1s represented 1.32%
of Spectrum's assets under management (AUM) on Feb. 28.
Spectrum's AUM was $21.4 billion on Dec. 31, when it was the
fifth-largest holder of the debt, Refinitiv data shows.
In comparison, PIMCO Investment Management, which had AUM of
$1.74 trillion as of Dec. 31, held about $775 million of the
debt at the time. PIMCO declined to comment.
In 2021 and early 2022 Spectrum held about $400 million of
Credit Suisse AT1 bonds, Jacoby said. The Credit Suisse debt
represents about 12% of the benchmark for CoCos, a massive slice
of the ICE BofA U.S. dollar contingent capital index ,
he said.
"It's a big ship when you want to turn it...and it takes
time," he said. "We had been paring back in Credit Suisse, had
an internal negative outlook for a little over a year."
Yields on the AT1 bonds are higher than at the height of the
European sovereign debt crisis a decade ago and spreads are
about four standard deviations wider of their average over the
prior three credit cycles, Jacoby said.
Spectrum, a member of the Principal Financial Group based in
Stamford, Connecticut, recently reduced by $10 million more than
$53 million in CS bonds yielding 9.75% it bought at issue,
Refinitiv data showed.
Spectrum is enthusiastic about CoCos as they offer "uncommon
value" for the market, said Matthew Byer, the firm's chief
operating officer. "This is a Credit Suisse event and this is a
Swiss bank regulation event, this is not a global disaster for
CoCos."
(Reporting by Herbert Lash; Editing by Alden Bentley and Sam
Holmes)
Messaging: herb.lash.reuters.com@reuters.net))
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