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Time heals all wounds. But bond investors wiped out by the Credit Suisse buyout may need more than a few months before diving into the additional Tier 1 bonds that rescuer UBS hopes to sell.
It’s easy to understand why investors in subordinated debt might be wary. They were dealt a major blow when the Swiss bank agreed to take over its failing rival in March. Securities worth $17 billion in face value were completely wiped out. Worse still, they were wiped out even though shareholders managed to retain some value, representing an extraordinary upheaval of the traditional hierarchy of capital.
Confusion over whether the decision was based on the terms and conditions of the bonds themselves or on emergency legislation, or both, did not help. Let us cite the market ructions, the bondholder trials and the resignation – for health reasons – of Urban Angehrn, the general director of the Swiss regulator Finma. He will leave his post at the end of September.
The new UBS AT1s will test investors’ short-term memory. But fears that the Credit Suisse fiasco could permanently destroy the market are exaggerated. In Europe, authorities were quick to reiterate that they considered debt a priority over equity. Spreads on a basket of AT1 securities, which swelled following the wipe, fell by a third. They are now barely above the long-term average. Furthermore, the market for new issues has reopened. BBVA, BNP and Italy’s Intesa have all raised new capital through AT1s.
Additionally, UBS is considering ways to minimize “Swiss risk,” the perception that its regulators might behave particularly aggressively toward bondholders. One idea under study would be to offer securities convertible into shares in the event of a problem. This would reduce the risk that bondholders would suffer a larger haircut than shareholders. Investors can also push for a detailed definition of what, exactly, would trigger the bail-in of bondholders – the “viability event,” as it is called.
These are all helpful suggestions. Still, investors could be forgiven for some residual unease. Resolving banking crises is a dirty business and regulators usually have broad powers to intervene. Terms and conditions, no matter how detailed, must be underpinned by trust. UBS is a well-capitalized bank. Still, it may need to offer high returns to attract investors.
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