Industry Updates

CoCo bond ETFs plummet as $17bn Credit Suisse AT1s wiped out

AT1 and COCB recorded double-digit losses on Monday

Theo Andrew

Credit Suisse

Contingent convertible bond (CoCo) ETFs recorded double-digit losses on Monday after the news $17bn of Credit Suisse’s Additional Tier 1 (AT1) debt will be written to zero as part of its rescue deal with UBS.

Bondholders were angered on Sunday after the Swiss regulator FINMA said the decision would help improve the bank’s capital, shunning bond investors who are normally higher up the pecking order than shareholders following bankruptcy proceedings.

The decision to wipe out the debt has already weighed heavily on the value of other banks, with the two ETFs in Europe tracking CoCo bonds plummeting this morning.

The Invesco AT1 Capital Bond UCITS ETF (AT1) fell as much as 12.9% and the WisdomTree AT1 Coco Bond UCITS ETF (COCB) was down 11.9% at their lowest points on Monday, before rallying slightly.

The ETFs had started their slide following the collapse of the 18th largest US lender Silicon Valley Bank on 10 March, with the AT1 and COCB down 19.3% and 23%, respectively.

Investors pulled $87m from Invesco’s AT1 ETF, which houses approximately $1.2bn assets under management (AUM), in the week of 17 March, according to data by ETFLogic.

AT1 and COCB have 2.9% and 2.7% weighted toward Credit Suisse bonds, respectively, according to their latest holdings data.

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.”

CoCo bonds are hybrid bonds that offer higher yields than more senior debt and are designed to be converted from bonds into equity in the case of a credit event.

Saxo Bank said the move by the Swiss regulator could spark legal proceedings given that $3.25bn in equity proceedings was made good by the deal.

“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,” Saxo Bank said.

Highlighting the level of investor anger, Jerome Legras, head of research at Axiom Alternative Investments, an investor in Credit Suisse's AT1 debt, told Reuters: “It is stunning and hard to understand how they can reverse the hierarchy between AT1 holders and shareholders.”

AT1 bonds initially rallied on Sunday on hopes bondholders would be protected following UBS’s acquisition of its rival, before slumping on concerns over the health of Credit Suisse.

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