Bank bondholders lose again
As part of the takeover of Credit Suisse ($CSGN) the Swiss regulator Finma has decided to write off Credit Suisse's AT1 capital in full. This is nothing more than convertible bonds (also known as coco) that are converted into equity when a bank gets into trouble. This is a mechanism that was introduced after 2008 to strengthen banks' capital when needed.
This move came as a surprise to many. Could this trigger a sell-off of bank debt?
Credit Suisse has been the poor student among systemically important banks in Europe in recent years, and with its customers (and to some extent investors) losing confidence, a takeover by longtime rival UBS ($UBSG) was the most obvious outcome.
It looks like a good deal for it, paying only a fraction of the bank's equity, estimated at $49 billion at the end of last year. Now, UBS will probably have to sell some assets to get a handle on competitive issues, but this deal is likely to be value-enhancing and welcome news for the banking system as a whole.
