ECB reassures bondholders

Linda Hall

IN an unexpected twist, investors in Credit Suisse’s additional tier­one (AT1) bonds saw 16 billion Swiss francs (€16 billion) slashed to zero by the UBS takeover. As a relatively risky investment, the AT1 bonds known as contingent convertibles or CocCos are a type of debt regarded as part of a bank’s regulatory capital.

They are also described as ‘bail­in’ bonds introduced to avoid a repetition of the government bailouts required during the 2008 global financial crisis.

Holders can convert CoCos into equity or write them down in certain situations, for example when a bank’s capital ratio falls below a previously­agreed threshold.

The unconventional move of prioritising Credit Suisse shareholders is at odds with the usual practice of favouring bondholders over shareholders when a bank fails and recently prompted turmoil in the market for convertible bank bonds.

Credit Suisse shareholders have received €2.788 billion in UBS shares and giving them preference in the deal was a departure from usual practice that was criticised in most quarters.

The European Central Bank, the European Banking Authority and the Single Resolution Board emphasised that they would continue to impose losses on shareholders before bondholders.

“This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions,” they said.

Meanwhile, CoCos issued by Spanish banks initially fell by an average 11.1 per cent but jitters subsided, although tension remains. Uncertainty also surrounds the way market will react when banks try to reissue these assets.