NEW YORK – One of the largest investors of the Credit Suisse bonds that were wiped out in the UBS takeover of the troubled Swiss bank still believes in the value of the debt class and the “bail-in” system designed to save banks seen as too big to fail.
Spectrum Asset Management on Monday said it liquidated all its Credit Suisse positions during late market trading on Saturday before the contingent convertible debt, called CoCos among traders, was written down to zero in the UBS deal.
Bail-ins were included in the Dodd-Frank Act to protect US taxpayers after the collapse of Lehman Brothers in 2008 so they would not bear the cost of a bailout. Now, banks in difficulty will be bailed in by the holders of CoCos, formerly known as Additional Tier 1 bonds (AT1).
“Anybody that bought CoCos who didn’t think ‘bailed-in’ had their head in the sand. Nobody likes it when it happens, but that’s the whole idea behind CoCos,” said Mr Philip Jacoby, chief investment officer at Spectrum.
“It’s painful and it bleeds out to the entire system and that’s what happened. The bail-in worked,” he said, adding that the integrity of the financial system overrode everything else.
Spectrum is a member of the Principal Financial Group based in Stamford, Connecticut.
The firm’s exposure to Credit Suisse AT1s represented 1.32 per cent of Spectrum’s assets under management (AUM) on Feb 28, 2023.
Spectrum’s AUM was US$21.4 billion (S$28.75 billion) on Dec 31, 2022, when it was the fifth-largest holder of the debt, according to data from market data firm Refinitiv.
In comparison, Pimco Investment Management, which had AUM of US$1.74 trillion as at Dec 31, 2022, held about US$775 million of the debt at the time. Pimco declined to comment.
In 2021 and early 2022, Spectrum held about US$400 million of Credit Suisse AT1 bonds, Mr Jacoby said. The Credit Suisse debt represents about 12 per cent of the benchmark for CoCos, a massive slice of the ICE BofA US dollar contingent capital index, he noted.
“It’s a big ship when you want to turn it... and it takes time,” he said. “We had been paring back in Credit Suisse, had an internal negative outlook for a little over a year.”
Yields on the AT1 bonds are higher than at the height of the European sovereign debt crisis a decade ago and spreads are about four standard deviations wider of their average over the prior three credit cycles, Mr Jacoby added.
Spectrum is enthusiastic about CoCos as they offer “uncommon value” for the market, said Mr Matthew Byer, the firm’s chief operating officer.
“This is a Credit Suisse event and this is a Swiss bank regulation event – this is not a global disaster for CoCos.” REUTERS
