Risky AT1 bonds rebound from plunge after Credit Suisse wipeout

The global market for risky bank debt has rebounded from the sharp sell-off triggered by the wipeout of $17bn of Credit Suisse bonds as part of its takeover by rival UBS last month.

The price of additional tier 1 debt, also known as contingent convertibles or AT1s, plunged after Swiss regulators shocked investors by writing the value of the bonds down to zero.

But a Bloomberg index of contingent convertible bonds globally has risen 10 per cent from its low on March 20 to a similar level to that seen before UBS’s acquisition of Credit Suisse. An iBoxx index of AT1 prices has also recovered to pre-takeover levels.

The gradual recovery in the market comes as fears of a broader banking crisis following the collapse of Silicon Valley Bank last month begin to ebb. Investors say they have been reassured by statements from regulators elsewhere that the Swiss decision to leave AT1 holders with nothing would not set a precedent for the wider $260bn market.

AT1s are a class of risky bank debt that can be converted into equity, or wiped out entirely, if a lender’s capital levels fall below a certain level. They were introduced in the wake of the global financial crisis to ensure that bondholders would absorb some of the losses in the event of bank failures, in order to shield depositors and avoid taxpayer-funded bailouts.

But Swiss regulators upended the normal hierarchy by wiping out AT1 holders despite giving shareholders $3.25bn in the UBS deal, undermining confidence in the broader market.

The European Central Bank and Bank of England were among the institutions that publicly said they would stick to the typical order of precedence and that equity holders should be wiped out first in any future bank failure.

“It’s been very good for the long-term health of the AT1 market that the other jurisdictions have come out and made their positions clear,” said Mark Holman, chief executive of TwentyFour Asset Management. “The long-term future of the AT1 market is not very different to the past, it’s a big market.”

Andrzej Skiba, head of US fixed income at RBC Global Asset Management, said regulators still saw AT1 debt “as a core part of the capital toolkit for the future” and that banks “also want to use those instruments going forward”. 

He added that the recent collapse in prices presented a buying opportunity for some investors, “especially focusing on the strongest, systemically important banks”.

Despite the recent recovery, AT1 prices remain well below levels seen at the start of the year, amid wider investor concerns over the health of the banking sector on both sides of the Atlantic.

Swiss debt is still seen as relatively unappealing. A Swiss franc-denominated UBS AT1 bond has risen just 3 per cent in price from its recent low.

Banks are also still wary of issuing new AT1 bonds. Japan’s Mitsubishi UFJ Financial Group this week delayed issuing new debt planned for April until at least mid-May.

Additional reporting by Harriet Clarfelt