The wipeout of $17bn of Credit Suisse bonds has sparked panic among rich Asian investors who had loaded up on the risky bank debt.
Under the terms of the UBS takeover of Credit Suisse, orchestrated by the Swiss government on Sunday, Credit Suisse’s additional tier 1 bonds were written down to zero while shareholders received $3.25bn.
The surprise decision stung some retail investors in Asia who are exposed to AT1s, a class of debt designed to take losses when institutions run into trouble but generally believed to rank ahead of equity on the balance sheet.
“We haven’t slept since Sunday,” said one Singapore-based private banker. “People are completely gobsmacked.”
In other parts of the world, the bonds are typically owned by institutional investors. Pimco, Invesco and Legg Mason are among the top holders of Credit Suisse’s AT1 bonds, according to Bloomberg data. Asia’s AT1 market is estimated to represent about $46bn out of the global total of $260bn.
The wipeout of Credit Suisse’s AT1s stunned investors because it forced bigger losses on some bondholders than shareholders, upending the traditional hierarchy of creditors.
Other regulators including the European Central Bank have since stressed that they would not follow the Swiss method in resolving a failing bank in their jurisdiction. Some investors are threatening legal action.
Asian private bank clients led selling on Monday, where some panicked sellers pushed down AT1s issued by banks in Asia by between 2 and 10 points, depending on the country. The market for the bonds recovered on Tuesday but Asia AT1s were still lower than last week.
The selling included wealthy clients who owned the AT1s with leverage and were receiving margin calls, said two private bankers.
Retail investors in Europe do not typically hold AT1s, and they are barred from doing so in jurisdictions including the UK.
In Asia, the instruments were popular with wealthy individuals who appreciated the brand names and the yields. A Credit Suisse bond issued last year and paying a 9.75 per cent coupon was particularly popular.
Angelina Lai, chief executive of the Hong Kong unit of the wealth manager St James’s Place, said her company had been asked about the instruments as recently as three weeks ago.
“We advised against the individuals holding the asset class directly, based on the complexity of the product and our strong views of keeping a diversified investment portfolio that is risk managed and rewarded accordingly,” she said.
Some investors also worried that issuance of new AT1 debt might dry up following the Credit Suisse takeover. AT1s are perpetual in maturity, but banks typically “call” the debt after an initial period and issue fresh bonds to finance the repayment to investors.
“There is the fact that the banks know they can’t issue more AT1s anytime soon, so may stop calling them. It has significant issues for valuation,” said one Singapore-based fund manager with regional rich clients.
A banker at one of Singapore’s top private banks said many wealthy private investors were angry. “A lot of clients are in shock, they didn’t understand the writedown risk under certain scenarios. It is not mass selling but a fair few want to get out.”
The banker said they could not disclose the identity of clients but that they were wealthy Asia individuals banking in Singapore and Hong Kong, including small to midsized family offices.