Additional Tier 1 Bonds and Credit Suisse’s Write-Down

March 23, 2023

The recent purchase of Credit Suisse, a Swiss bank, by its rival UBS, has left investors struggling to understand the deal. One outcome that is causing significant distress is the decision to write down around SFr16bn ($17bn) in Additional-Tier 1 (AT1) bonds issued by Credit Suisse, which could even spell the end of the asset class. In this article, we will explore what AT1 bonds are, their purpose, and the impact of Credit Suisse’s write-down on the market.

What are AT1 Bonds?

AT1 securities are a type of “contingent-convertible” bonds developed after the global financial crisis of 2007-09 to prevent the need for government-funded bailouts of struggling banks. These instruments, also known as “cocos,” are a blend of bank equity and debt. In good times, they behave like relatively high-yield bonds. When things go bad, and certain trigger points are reached, such as a bank’s capital falling below certain levels relative to assets, the bonds convert to equity, reducing the bank’s debt and absorbing losses.

Impact of Credit Suisse’s Write-Down

The market for AT1s is worth around $275bn, and private banks in Asia have historically been eager buyers. However, Credit Suisse’s decision to write down AT1 bonds has infuriated investors and caused significant damage to the market. The write-down was the largest in history, more than ten times larger than when Banco Popular failed in 2017, taking $1.4bn of AT1 bonds with it. The real damage to the market was that it upended the expected pecking order, placing stockholders above AT1 bondholders. This was confirmed on March 19th, and it has already affected the price of AT1 bonds issued by other banks.

The Future of the Asset Class

The revelation that stockholders may be left with something and coco holders with nothing is contrary to the understanding many buyers had about what they were purchasing. The idea that coco buyers may feel burned could spell doom for the asset class. The future of AT1 bonds is uncertain, and commentary about the future of the asset class ranges from bleak to apocalyptic. Goldman Sachs has warned that it has become difficult to assess the spread between yields on AT1 bonds and different forms of high-yield credit due to a lack of clarity on future resolutions.

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