Banking Stocks Tumble As Credit Suisse's $17 Bn Bonds Deemed Worthless After UBS Takeover: Report

Shares of Standard Chartered Plc and HSBC fell more than 6 per cent in Hong Kong on Monday. The MSCI index for financial stocks in Asia ex-Japan was down 1.3 per cent

Credit Suisse had earlier in a presentation to investors suggested, in a write-down scenario, shareholders suffer before AT1 bonds suffer losses.

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Following the $3.23 billion deal of UBS Group buying rival Credit Suisse, it was announced that Credit Suisse Group AG bonds of about 16 billion Swiss francs ($17.3 billion) will be deemed worthless. The announcement has sent jitters in the global markets as Banking stocks tumbled on Monday, reported news agency Reuters. 

Shares of Standard Chartered Plc and HSBC fell more than 6 per cent in Hong Kong on Monday. The MSCI index for financial stocks in Asia ex-Japan was down 1.3 per cent, the report added.

Swiss financial regulator FINMA said in a statement, “The extraordinary government support will trigger a complete write-down of the nominal value of all AT1 shares of Credit Suisse in the amount of around CHF 16 billion, and thus an increase in core capital.”

During the global financial crisis, AT1 bonds were introduced in Europe to act as shock absorbers should banks begin to fail. If a bank's capital ratios drop below a predetermined level, they are intended to cause irreversible losses to bondholders or be converted into equity, thus supporting the bank's balance sheet and enabling it to continue operating.

While the efforts by the Swiss government and US banks appeared to have gained some investor confidence in early Asian trade, the rally reversed as the focus shifted to the Credit Suisse bondholders. 

The report said that investors are concerned about what it means for holders of AT1 bonds issued by other banks. It also added to a long list of other dangers, such as contagion, the precarious state of US regional banks, and moral hazard.

“It should be clear that after more than a week into the banking panic, and two interventions organised by the authorities, this problem is not going away. Quite the contrary, it has gone global…The reports that UBS is acquiring Credit Suisse will likely magnify Credit Suisse’s problems by moving them to UBS,” Mike O'Rourke, Chief Market Strategist at Jones Trading told Reuters. 

According to a Bloomberg report, the bond wipeout is the biggest loss yet for Europe’s $275 billion AT1 market. In 2017, a €1.35 billion ($1.44 billion) loss was suffered by junior bondholders of Spanish lender Banco Popular SA. 

The report said that Credit Suisse had earlier in a presentation to investors suggested, in a write-down scenario, shareholders suffer before AT1 bonds suffer losses. That’s why the decision to write down the bank’s riskiest debt — rather than its shareholders — provoked a furious response from some of Credit Suisse’s AT1 bondholders.

According to data compiled by Bloomberg, Pacific Investment Management Co., Invesco Ltd., and BlueBay Funds Management Co. SA were among the many asset managers holding Credit Suisse AT1 bonds.