Credit Suisse’s $17 Billion AT1 Bonds Hang in Balance Amid Talks

Abhinav Ramnarayan, Irene García Pérez and Tasos Vossos
·2 min read

(Bloomberg) --

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Credit Suisse Group AG’s $17.3 billion stack of its riskiest bonds is on a knife-edge as investors face either a wipe out in a nationalization or potentially record gains if a deal with UBS Group AG succeeds.

It’s an odd case of an almost binary outcome for the traders who are frantically changing their quotes on the bank’s Additional Tier 1 notes this rare weekend session. A deal with UBS likely means only shareholders would feel the pain and the bonds would stand a very good chance of eventually reaching 100% of face value. No deal could mean they crash down to zero as regulators force a writedown. The contrasting scenarios have triggered huge swings in the levels at which banks are willing to buy or sell throughout the day on Sunday.

Additional Tier 1 notes were quoted at prices ranging from the mid 20s to high-40 cents on the dollar, a drop of about 20 cents from roughly an hour earlier, according to people with knowledge of the matter, asking not to be named because price quotes in the over-the-counter market are private. They’re broadly similar to their closing levels on Friday, when prices ranged between the 20s and 30s.

It’s a swift turnaround for the narrative, which had shifted positive on Sunday amid optimism that the up to $1 billion bid by UBS would’ve avoided a scenario that saw bondholders suffer punitive losses on some of the notes.

The securities, introduced after the global financial crisis, are designed to help banks bolster capital to meet regulations designed to prevent failure. They can be written off if a bank’s capital levels fall below a specified level. In Credit Suisse’s case its common equity tier 1 would need to fall below 7% of its risk-weighted assets.

The Swiss authorities are now considering a full or partial nationalization of Credit Suisse as a fallback option if a UBS deal collapses with time running out. Reuters reported on Sunday afternoon that the Swiss authorities are examining imposing losses on bondholders as part of a rescue plan.

Several banks including Goldman Sachs, Morgan Stanley and Jefferies Financial Group have kept their bond sales and trading desks open through the weekend for Credit Suisse bonds, a rare occurrence except in times of stress.

(Add info on scenarios in first and second paragraph, updates pricing in third)

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