The wipeout of $17bn of Credit Suisse bonds has thrown into question further issuance in the market for risky bank debt, with some of Asia’s biggest banks considering pausing sales.
Major banks in Japan, Singapore and Hong Kong are placing new additional tier 1 (AT1) bond deals on hold until market conditions stabilise, according to people familiar with the plans.
The hiatus follows three days of turmoil triggered by the decision to write down the value of Credit Suisse’s AT1 bond to zero as part of the bank’s takeover by Swiss rival UBS, while shareholders received $3.25bn. AT1s are a class of debt designed to take losses when institutions run into trouble but are generally believed to rank ahead of equity on the balance sheet.
Regulators in the eurozone, UK and Hong Kong have stressed that they will not follow Swiss authorities in upsetting the usual hierarchy of bank creditors.
Even so, prices in the $260bn AT1 market have tumbled this week. Analysts and investors have warned that buyers are likely to demand substantially higher borrowing costs, potentially creating a “zombie market” where banks are reluctant to issue fresh debt to refinance older bonds.
“There is no point for Asian banks to issue at such elevated yield levels, but I do expect the fundamentally stronger ones to come back to issue AT1s when the market stabilises,” said Nicholas Yap, head of Asia credit desk analysts at Nomura.
MUFG and SMFG, two of the three banks responsible for the lion’s share of AT1 issuance, were expected to issue AT1 bonds in April and were already sounding out investor appetite when the crisis at Credit Suisse erupted.
People with knowledge of the planned sales say the banks may now have to adjust their terms or pause the issuance depending on how badly investor sentiment has been hurt by the wipeout at the Swiss bank.
Bond traders said the pipeline for new AT1 issuance in Hong Kong was now empty, and was unlikely to restart until the second half of the year.
The fallout from the Credit Suisse deal “changes the whole nature of the [AT1] market, and I think the ability to issue going forward is probably close to zero”, said Greg Peters, co-chief investment officer of PGIM Fixed Income. “Basically, it’s a zombie market going forward in my mind.”
AT1s were designed in the wake of the 2008-09 financial crisis as a way for bondholders to shoulder a greater portion of the losses at failing banks and avoid taxpayer-funded bailouts. The bonds are perpetual and have no pre-determined maturity, although they are typically repaid once an initial “non-call” period expires and refinanced with fresh issuance. Investors value the flexibility of getting their money back and choosing whether to buy new bonds.
Part of the reason for the fall in prices is that investors are factoring the “extension risk” of banks not calling their bonds, according to Lotfi Karoui, chief credit strategist at Goldman Sachs.
UniCredit, Crédit Agricole and Barclays are among the European banks with “call” dates this year. But looking at the broader AT1 market, “2023 is relatively on the benign side”, said Karoui, with “no imminent refinancing needs”.
“I would probably expect issuers to act rationally and wait for funding costs to come down” before rolling over their AT1s, he said, adding that roughly 60 per cent of the current stock of European AT1s would hit their first call dates before the year-end 2026.
At least one Singapore-based bank has stopped issuance, said one person familiar with the market.
DBS, Singapore’s biggest bank, said it had no AT1 issuance plans. The bank assured investors it was well capitalised and its exposure to Credit Suisse was “insignificant”. DBS has issued a number of AT1 securities in the past.
OCBC, another top Singapore bank, did not respond to a request for comment.
Most analysts argue that the decision by Swiss authorities to wipe out AT1 holders should not be seen as a precedent for other jurisdictions. Still, it has led to nervousness across the global market for bank bonds.
The risk officer at one Chinese state bank said the lender would be more cautious in valuing the writedown risks on AT1s, and would no longer “blindly believe” that a Swiss-style 100 per cent writedown could never materialise.
One Hong Kong-based wealth manager with a large China presence said the global market for AT1 bonds was effectively “dead” for the short term. “Any bank planning new issuance will have to offer an impossibly high premium to have a hope of attracting investors after this.”