Banks Sound Off on AT1 Outlook

As part of the Credit Suisse takeover deal, Swiss regulators ruled that the fallen Swiss lender's 16 billion francs ($17 billion) in Additional Tier-1 (AT1) bonds would be completely written down to zero. This shook markets as this type of debt supposedly ranks higher than equity in the capital structure of the bank but Swiss authorities have prioritized shareholders over AT1 bondholders.

Some of these bondholders are reportedly considering legal action. Switzerland's Financial Market Supervisory Authority (Finma) defended the decision, noting that the AT1 instruments issued by Credit Suisse are contractually allowed to be wiped out in a «viability event», especially if «extraordinary government support is granted».

What say the banks?

«Permanent Destruction in Demand»

According to Goldman Sachs, the subsequent market sell-off was a «knee jerk reaction» to an unexpected outcome and there could be broader implications to the asset class further down the line. 

«In the long term, we are a little concerned about the potential permanent destruction in demand […] I do think that investors will have to re-assess how the risk-reward looks like in those instruments, particularly at times of rising financial distress,» said Goldman Sachs chief credit strategist Lotfi Karoui in a «Reuters» report.

Bondholder-Friendly Region

While Nomura noted that the AT1 wipeout is «technically not illegal», it echoed sentiments about unease over the write-off decision and the future of the asset class. 

In contrast, the Japanese bank is more positive on outcomes from similar situations in the Asia Pacific region with expectations for most authorities to adopt a «more bondholder-friendly approach», especially in Hong Kong and Korea. Australia was highlighted as an exception as its regulators discouraged banks and insurers from calling in AT1 debt.

«Nevertheless, the [Credit Suisse] decision clearly does not respect a bank's hierarchy of claims and, at least from an investor perspective, calls into question the viability of AT1s as an asset class,» said Nomura analyst Nicholas Yap in a note.

Small Bank Risk

The stable outlook for Asia may not be all-encompassing with certain lenders expected to experience greater difficulty in replenishing capital via AT1 bond issuances.

«Regulators may tighten capital and liquidity requirements, which may impact smaller banks more,» according to a research note by Citi.

The US lender expects an AT debt re-pricing across Asian banks' capital structures due to the Credit Suisse wipeout, though it said the broader market in the region has not been undermined in the long term.