Who is stuck with Credit Suisse’s $23 billion worthless AT1 bonds?

HONG KONG – Credit Suisse’s junior bond holders are not happy. The

UBS takeover,

orchestrated by the Swiss government without the blessing of shareholders on either side, will trigger a complete write-down of their US$17.3 billion (S$23 billion) worth of additional tier 1 (AT1) notes. Some are considering legal action.

Losses of this magnitude are unsettling to markets already shaken by the latest banking crisis. Therefore, it is of public interest to ask who are the owners of these risky bonds, introduced after the global financial crisis.

It is a puzzle that needs to be resolved.

Big money managers such as Pacific Investment Management Company and Invesco are among the largest holders, owning around US$807 million and US$370 million respectively. BlackRock had about US$113 million at the end of February, although the firm has reduced some of its holdings in recent weeks. Elsewhere, funds managed by Lazard Freres Gestion and GAM Investments are also exposed.

The Middle East has formed deep ties with Credit Suisse. In 2013, Qatar converted more than US$4.5 billion of a special type of debt into AT1 bonds, although it is unknown whether the Gulf state still owns any of them.

Or how about Credit Suisse’s own employees? For years, senior executives were paid in part in AT1 notes, Semafor reported. The news outlet did not offer concrete figures.

Beyond these, who owns the bulk of those bonds is as opaque as how the takeover deal was struck.

Fortunately, banks are unlikely candidates, in that they are heavily penalised for owning peers’ capital instruments. Bloomberg Intelligence offered a good example. In Japan, investing in another lender’s AT1 notes carries a 1,250 per cent risk weight. This means banks must hold at least one dollar of their own equity for every dollar of AT1 notes they have in their securities portfolio.

Mom-and-pop investors should also be largely spared. In many jurisdictions, retail investors are not allowed to buy AT1 notes because of their complexity. Hong Kong, for instance, is obsessed with consumer protection. Bonds traded over the counter – the market norm – are off-limits. As at 2020, only 64 out of the 1,574 bonds outstanding were offered to the public. As a result, any exposure is likely to be indirect – probably through people’s mutual funds or exchange-traded funds holdings – and relatively muted, given that these instruments tend to be diversified.

This leads us to the ultra-rich. Wealthy individuals as well as small to mid-sized family offices in Hong Kong and Singapore have gobbled them up, and a lot of them are “in shock”, according to the Financial Times. JPMorgan Chase concurs, commenting in a recent report that “we do not have data on who holds AT1, but we expect it to be held by institutional investors as well as private bank clients”.

Just like notes issued by Chinese real estate developers, AT1 bonds are tempting in that they offer juicier coupon payments than plain-vanilla deposits. One Credit Suisse bond issued in 2022 that was paying 9.75 per cent was particularly popular.

For years, Asia’s wealthy have been the profit centre at Credit Suisse’s crown-jewel wealth management division. They have been shaken by this fallout, unsure for weeks whether their money was safe with the Swiss bank. Now, some may be looking at actual losses – to the tune of billions of dollars. Do they still have faith in their private bankers?

Credit Suisse is putting on a brave face, urging calm among its employees and carrying on with its annual investment conference in Hong Kong this week. But deep down, its senior executives must know that the crazy, rich, anxious Asians are not happy, and the Swiss brand is not as prestigious as before. BLOOMBERG