After Credit Suisse wipeout, AT1 bonds make a return in the global market

A Bloomberg index of contingent convertible bonds has risen 10 per cent from the lows seen during the Credit Suisse crisis


Illustration by Binay Sinha

BS Web Team New Delhi

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The global market is again bullish on risky bank debt, reports Financial Times (FT). AT1 bonds that plunged after the Credit Suisse fiasco have now rebounded.

According to FT, the Bloomberg index of convertible bonds has recovered to the levels seen before UBS' acquisition of Credit Suisse.

AT1 bonds registered a sharp sell-off that was triggered by the wipeout of $17 billion of Credit Suisse bonds. The price of AT1s plunged after Swiss regulators shocked investors by writing the value of the bonds down to zero.

The collapse of Silicon Valley Bank last month and the downfall of Credit Suisse sparked fears of a global financial crisis. However, there has been some relief since the fears of a broader banking crisis have ended.

The report quoted investors as saying that they have been reassured by statements from regulators who stressed that the Swiss decision to give AT1 holders nothing in return for their investment would not set a precedent. Notably, the AT1 bond market has a global market of around $260 billion.

AT1 bonds are a class of risky bank debt that offer attractive returns but come with the risk of being converted into equity or being wiped out entirely in case a lender's cash reserves fall below a given limit.

These bonds were introduced as an additional buffer in the wake of the global financial crisis of 2008. They have been designed to ensure that AT1 bondholders would absorb a part of the loss in the event of bank failures. This was done to shield depositors and prevent bailouts funded by taxpayers.

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First Published: Apr 06 2023 | 4:08 PM IST

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