UBS $3.2B takeover of Credit Suisse wipes out AT1 bonds, proves bank bonds are more risky than previously believed

03/22/2023 / By Belle Carter

Holders of additional tier 1 (AT1) bonds from the beleaguered Credit Suisse were angered by the announcement that their investments will be written to zero, following the $3.2 billion takeover of rival banker UBS.

According to CNBC, the Swiss Financial Market Supervisory Authority (FINMA) broke the news. This effectively rendered AT1 bonds worth 16 billion Swiss francs ($17.35 billion) worthless, while shareholders will receive payouts as part of the bail-in. CNBC added that the deal between UBS and Credit Suisse was inked on March 19 with the “help of Swiss authorities.”

Also called contingent convertibles, AT1 bonds are debts that are considered part of a bank’s regulatory capital. Holders can convert them into equity or write them down in certain situations, such as when a bank’s capital ratio falls below a previously agreed threshold.

AT1 bonds were created in the aftermath of the 2008 financial crisis as a way of shifting risks away from taxpayers in crisis situations. According to CNBC’s Sophie Kiderlin, AT1 bonds often have higher yields than others due to their elevated risk factor.

In a research note, credit strategists from Goldman Sachs said FINMA’s decision can be interpreted as an effective subordination of AT1 bondholders to shareholders. They added: “It also represents the largest loss ever inflicted to AT1 investors since the birth of the asset class post-global financial crisis.”

Elisabeth Rudman, DBRS Morningstar global head of financial institutions, remarked that FINMA’s move should not come as a shock.

“AT1s are there to absorb losses. They’ve done what they were supposed to do,” she said during a March 20 appearance on “Squawk Box Europe.”

Credit Suisse has been struggling amid years of losses and difficulties. However, things came to a head when the Saudi National Bank said it could no longer support the Swiss bank financially due to regulatory restrictions.

The Swiss National Bank stepped in, offering a $54 billion lifeline to the beleaguered bank. But critics remarked that the offer would only provide temporary relief as the banking system crash seems to loom in the not-so-distant future. (Related: Credit Suisse shares surge after record decline – thanks to Swiss central bank’s $54B loan offer.)

UBS takeover of Credit Suisse risks thousands of UK jobs

Credit Suisse’s predicament followed the collapse of two U.S. banks – Silicon Valley Bank in California and Signature Bank in New York. The failures of the two banks triggered massive fears of a banking system collapse among shareholders.

Moreover, UBS’ takeover of Credit Suisse – reportedly forced by the Swiss government – remains unclear for more than 5,000 Credit Suisse and 6,000 UBS employees in London. Quoting sources knowledgeable about the matter, the Guardian said they expect investment banking roles to be the worst-hit group among those in the British capital. As many as 20 percent of workers would be laid off across other business areas.

According to a Credit Suisse insider, the bank’s merger with UBS had no clarity other than “there will be fewer jobs to go around.” They continued: “In that environment, we’re all rewriting our CVs and trying to hold it together.”

The same insider added that it was too soon to provide sure numbers about the total number of workers who may be laid off. Other sources, meanwhile, said some employees within Credit Suisse’s wealth and asset management arms had been offered retention payments by UBS. Both banks declined to comment on cutting or reconfiguring the workforce in connection with the merger.

Collapse.news has more stories about the failure of Credit Suisse.

Listen to the March 20, 2023 edition of Health Ranger Mike Adams’ “Situation Update” regarding the bigger repercussions of the UBS takeover of Credit Suisse below.

This video is from the Health Ranger Report channel on Brighteon.com.