Credit Suisse Rescue Deal Will ‘Kill Off’ CoCo Bond Market, Expert Warns

Serious questions arise regarding the real value of contingent convertible bonds.

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Reviewed by: Theo Andrew
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Edited by: Theo Andrew

LONDON − The write-off of $17bn of Credit Suisse’s Additional Tier 1 (AT1) debt to zero as part of its rescue deal with UBS is likely to “kill the contingent convertible (CoCo) bond market”, Louis-Vincent Gave, founding partner and CEO of research house Gavekal, has warned.

In a note titled The Credit Suisse Take-Under, Gave said the wipeout of the CoCo bond market was an “arresting development” given that bondholders rank above equity investors following bankruptcy proceedings.

It comes after the Swiss regulator FINMA said on Sunday the decision would help improve the bank’s capital, angering bondholders.

Introduced in the wake of the Global Financial Crisis, European banks widely used CoCo bonds to bolster their balance sheets after both the 2008 mortgage crisis and the 2011-13 eurozone crisis.

“For equityholders to get ‘something’ and CoCo bondholders to get ‘nothing’ raises serious questions about the real value of CoCo bonds,” Gave wrote. “To cut a long story short, the terms of the Credit Suisse take-under is likely to kill the CoCo market.

“Breaking the CoCo bond market means that in the next crisis banks will have to fund themselves in new ways, or shareholders will simply face massive dilution.”

CoCo bond ETFs recorded double-digit losses early on Monday following the news of the deal, before clawing back some of the losses throughout the day.

The Invesco AT1 Capital Bond UCITS ETF (AT1) had fallen 5.7% at market close on Monday while the WisdomTree AT1 Coco Bond UCITS ETF (COCB) was down 7.2%.

An Invesco spokesperson told ETF Stream: “Our investment teams are continuing to monitor the situation to manage our clients’ assets in light of current market conditions.”

Saxo Bank also raised concerns about the future of the CoCo bond market, particularly for European and UK banks that issue a similar type of debt.

“The risk from the UBS takeover of Credit Suisse stems from the wipeout of Credit Suisse’s $17bn of AT1 bonds and if this stokes a wider assessment of the credit quality of similar bonds issued by other banks, particularly European and UK banks that have issued debt of a similar type,” it said.

“The fact that Credit Suisse’s CoCos were not converted to equity but written down could mean a broader re-rating and repricing in the corporate bond markets.”

European bank ETFs fell by as much as 4% on Monday morning with the deal doing little to reassure investors, before rallying throughout the day.

Theo Andrew joined ETF Stream as a senior reporter in September 2021. He has over four years of investment writing experience spanning pensions and retail investments, most recently at Citywire, where he was a senior reporter covering environmental, social and governance investing.