What Should Credit Suisse Do With Its Worthless AT1 Bonds?

A number of junior bondholders at Credit Suisse Group AG are unhappy with the company's financial results. A complete write-down of UBS Group AG's $17.3 billion Additional Tier 1 notes will result from the Swiss government orchestrating the takeover, which was carried out without the consent of shareholders on both sides. Many are considering legal action.

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It is of public interest to ask who is the owner of these risky bonds, introduced after the global financial crisis, as losses of this magnitude are unsettling to markets already shaken by the latest financial crisis.

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We need to solve this puzzle.

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Invesco Ltd. and Pacific Investment Management Co. own around $807 million and $370 million, respectively, among the largest holders. Despite reducing some of its holdings in recent weeks, BlackRock Inc. had approximately $113 million at the end of February. Aside from Lazard Freres Gestion, GAM Investments and Lazard Freres Gestion funds were also affected.

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Credit Suisse has formed close relationships with the Middle East over the past few years. Qatar acquired AT1 bonds in 2013, after converting over $4.5 billion in a special type of debt into AT1 bonds. However, it is not known to this day whether the Gulf state still holds any AT1 bonds in its portfolio.

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Credit Suisse itself has been paying at least part of its employees with AT1 notes for years, according to Semafor. The news outlet did not give specific figures but suggested that senior executives received AT1 notes as part of their compensation.

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Further, it remains unclear who owns the majority of these bonds, in the same way, that the takeover deal was negotiated in an opaque way. 

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A good example of this is Trade Algo’s report on banks, which states that they are heavily penalized for owning peers' capital instruments. This means that banks are unlikely candidates since they are heavily penalized for owning peers' capital instruments. As a result, banks in Japan are required to hold at least $1 in their own equity for every dollar of AT1 notes in their security portfolios. 

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In addition to the small-scale investors, a large portion of them should also be spared. Because of the complexity of AT1 notes, retail investors are not allowed to buy them in many jurisdictions. For instance, Hong Kong focuses a lot on consumer protection. Over-the-counter bonds, which are the market norm, are not accessible for purchase. There were 1,574 outstanding bonds when the year 2020 began. The total number of bonds offered to the public was only 64. 

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Since these instruments are becoming increasingly diversified, any exposure to these correlations is likely to be indirect - most likely through investments in mutual funds or exchange-traded funds - and relatively mild, given that people tend to invest in diversified instruments anyway.

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Trade Algo claims that the ultra-rich have gobbled them up, along with small to medium family offices, and that many of them are "in shock." In a recent report, JPMorgan Chase & Co. commented that "we do not have information on who holds AT1, but we expect institutional investors to own it." AT1 bonds offer juicier coupon payments than plain vanilla deposits, so they are just as appealing as notes issued by Chinese developers. In 2010, a Credit Suisse bond that paid 9.75% was exceptionally popular. 

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As a crown jewel wealth management division of Credit Suisse for years, Asia’s wealthy have been the main source of profit for the company. They are now facing actual losses - to the tune of billions of dollars - as a result of this fallout, they were uncertain for weeks whether their money was safe in the Swiss bank. Do they still trust their private bankers?

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As Credit Suisse continues its annual investment conference this week in Hong Kong, it is maintaining a brave face, encouraging employees to remain calm, and continuing with its annual conference. The media are not invited, as this columnist is disappointed to find out. The Swiss brand is not as prestigious as it used to be, and the crazy, rich, anxious Asians are not happy, deep down.