Shareholders to absorb losses before bond holders: MAS

Equity holders will absorb losses before holders of Additional Tier 1 and 2 bonds in the event of a resolution. PHOTO: ST FILE

SINGAPORE - Shareholders will absorb losses before bond holders, according to the hierarchy of claims in the event of a liquidation, said the Monetary Authority of Singapore (MAS).

In a statement released late on Wednesday, the central bank said equity holders will absorb losses before holders of Additional Tier 1 (AT1) and Tier 2 capital instruments in the event of a financial institution resolution.

A resolution is when a financial institution is seized by the central bank and restructured to preserve its financial stability and critical functions.

MAS said creditors who receive less in a resolution compared to what they would have received had the financial institution been liquidated would be able to claim the difference from a resolution fund that would be funded by the financial industry.

“The creditor compensation framework will also apply in the exceptional situation where MAS departs from the creditor hierarchy in order to contain the potential systemic impact of the financial institution’s failure or to maximise the value of the financial institution for the benefit of all creditors as a whole,” said MAS.

MAS said its resolution framework is in line with the Financial Stability Board’s key attributes of effective resolution regimes for financial institutions.

AT1 bonds in Singapore are offered in the wholesale market, which is only for institutional investors, accredited investors, or transactions in denominations of at least $200,000.

No prospectus for the offering of AT1 bonds to retail investors has been registered with MAS.

“As with other investment products, financial institutions that offer or distribute AT1 bonds are expected to make accurate and clear disclosures of key product features and risks to investors.

“Investors should understand the risks and rewards, and exercise due care in their selection of investment products,” said MAS.

The announcement by MAS to give clarity to the markets follows similar moves by other central banks, including regulators in the European Union and Britain. The Hong Kong Monetary Authority took the same approach on Wednesday.

The regulators’ statements come in the wake of the wipe-out of US$17 billion (S$22.7 billion) worth of Credit Suisse AT1 bonds as the lender is to merge with Swiss rival UBS.

This was controversial, as shareholders of Credit Suisse were put before the AT1 holders.

AT1 bonds, sometimes also known as contingent convertible or CoCo bonds, are a relatively risky class of bank debt and were designed after the financial crisis of 2007 to 2009 in order to prevent future bailouts.

When a bank becomes insolvent, AT1 bond holders have a right to any payout before shareholders but after senior bond holders have taken their share.

The Credit Suisse AT1s were issued at a yield of 9.75 per cent in 2022.

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