Riskiest bonds for some Asian banks fall by record on Credit Suisse rescue deal
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The debt of some lenders’, designed to be among the first to face write-downs if a institution gets into trouble, dropped by record amounts.
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Jakarta – Some banks’ riskiest bonds fell by a record during Asian trading on Monday after holders of Credit Suisse‘s contingent convertible securities, also known as additional tier 1 (AT1) bonds, suffered a historic 16 billion franc (S$23 billion) loss.
Some lenders’ debt, designed to be among the first to face write-downs if an institution gets into trouble, dropped by record amounts. Bank of East Asia’s 5.825 per cent perpetual dollar note slumped 9.4 cents on the dollar to about 80 cents, according to data compiled by Bloomberg.
HSBC’s US$2 billion (S$2.7 billion) AT1 bond fell more than 5 cents to below 90 cents on the dollar, according to traders. This would be its biggest daily drop since it began trading early this month.
UBS Group’s decision to buy rival Credit Suisse triggered a complete write-down of the beleaguered lender’s convertible notes, the biggest loss yet for Europe’s US$275 billion AT1 market, created after the 2008 global financial crisis to ensure losses would be borne by investors not taxpayers.
While the acquisition was made to contain a crisis that threatened to spread across global financial markets, there were ripple effects on Asian bonds on Monday.
“It does not necessarily mute contagion risk,” Dr Shane Oliver, AMP head of investment strategy and chief economist, told Bloomberg Television. “Funding costs for banks, whether it is capital or debt, in Europe will go up.”
Analysts at S&P Global Ratings and Fitch Ratings said last week that factors such as stickier deposits and the prospect of a government backstop put Asian lenders in a relatively good spot.
Yet just a few months ago, Asian financial institutions’ perpetual notes suffered unprecedented drops after a South Korean insurer decided to buck market convention by skipping a call option. It later reversed the decision.
“A lot of investors will want to reduce their exposure to the banking sector and if they cannot sell the weaker names, the next step will be to sell the next weakest that still has liquidity,” said Ms Pauline Chrystal, a portfolio manager at Kapstream Capital in Sydney. “Riskier securities will tend to sell off more, so either lower-rated issuers or down the capital stack.” BLOOMBERG
