Last week Credit Suisse made headlines when the Swiss Central Bank offered a $54bn loan to keep them going and at the same time to try and calm the markets. However, the market turmoil persisted and over the weekend UBS announced that it was buying CS for a fraction of its value. The deal included a complete write-down of the CS’s $17bn AT1 bond position.
These bonds are Contingent Convertible (CoCos), which in principle are designed to absorb a loss if the financial institution is in trouble. However, I think it’s more than fair to say that this massive write-down took a lot of investors by surprise. Technically, given that bonds are a fixed income instrument, they should get paid before any equity in case of a difficult situation. Despite the AT1 being a different type of bond, them being wipeout when the equity holders are still getting a “deal” might leave some wanting to exit their positions. What will happen to the bond market? Will institutions sell off their AT1s or will they hold?