Tuesday 06 Jun 2023
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(March 22): Additional Tier 1 bonds in Switzerland are paying the price for the controversial writedown of Credit Suisse Group AG’s notes.

Yields on Swiss banks’ AT1 notes have jumped more than similar bonds issued by European lenders since the wipeout of US$17 billion Credit Suisse notes, data compiled by Bloomberg show.

In the case of UBS Group AG — the largest remaining AT1 issuer in Switzerland — the yield premium over similar bonds in the rest of Europe has tripled since Friday.

“There has to be a Swiss premium as investors cannot assess Swiss AT1s from a standard fundamental framework anymore,” said Adrien Letellier, a credit analyst and portfolio manager at Bordier & Cie, referring to the risk premium of the country’s notes over those elsewhere.

Swiss AT1 yields have soared since the government-brokered takeover of Credit Suisse by its larger rival, which included total writedown of the lender’s AT1 notes but maintained some value for shareholders.

While Credit Suisse’s bond documents stated that investors could be at risk of a writedown under certain scenarios, bondholders typically only face losses after equity investors are fully written down.

Some of Credit Suisse’s AT1 holders are now exploring legal options.

“The bottom line is that Swiss regulators choose to favour equity versus credit so a premium should be required,” said Sebastien Barthelemi, head of credit research at Kepler Cheuvreux.

Other Swiss AT1 issuers are also being punished in the fallout from the decision. As well as UBS, Julius Baer Group Ltd and EFG International AG have AT1 notes in foreign currencies, based on data compiled by Bloomberg, though both are significantly smaller and less liquid issuers. Both firms’ AT1s have underperformed European peers since the Credit Suisse wipeout.

As for the rest of the region’s AT1s, reassurances from regulators in Europe and the UK that common equity instruments would be the first to take losses in their jurisdictions in a similar scenario soothed the market somewhat, leaving Switzerland as a clear outlier.

Yields for similar bonds in the rest of Europe jumped on Monday but have since slightly pulled back, with the average yield on an index of AT1s issued by European banks at 13.1%.

To be sure, that’s still pretty high compared to last week, and may be seen as an opportunity by some investors.

“For pure trading-oriented, momentum accounts, the selloff on Monday was a good buying opportunity,” said Jochen Felsenheimer, a portfolio manager at XAIA Investment Gmbh.

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