Currently, mainstream media reporting of the writedown of Credit Suisse AT1 bonds seems to be missing an extremely important fact about how the bonds are structured - they are designed to be written down before equity, they have a trigger to be zeroed if the capital ratio (CET1) falls below 7%. So they were written down as they were designed; it was not Swiss regulators imposing arbitrary losses on bondholders.
Resolution
At the end of March, I will google for "credit suisse bonds" and read the top result that is related to the writedown of the AT1 bonds. Resolves YES if it mentions the 7% CET1 trigger at all, and NO if it doesn't.
Background
Matt Levine https://www.bloomberg.com/opinion/articles/2023-03-20/ubs-got-credit-suisse-for-almost-nothing explains well how Credit Suisse's AT1 bonds work:
If the bank’s common equity tier 1 capital ratio — a measure of its regulatory capital — falls below 7%, then the AT1 is written down to zero: It never needs to be paid back; it just goes away completely.
investors seem to think that AT1s are senior to equity, and that the common stock needs to go to zero before the AT1s suffer any losses. But this is not quite right. You can tell because the whole point of the AT1s is that they go to zero if the common equity tier 1 capital ratio falls below 7%.
This, again, is very explicitly the whole thing that the AT1 is supposed to do, this is its main function, this is the AT1 working exactly as advertised. But notice that in this simple example the bank has $950 million of assets, $850 million of liabilities and $100 million of shareholders’ equity. This means that the common stock still has value. The common shareholders still own shares worth $100 million, even as the AT1s are now permanently worth zero.
On the other hand, if I google for "credit suisse bonds" right now the first result is https://www.cnbc.com/2023/03/20/17-billion-of-credit-suisse-bonds-worthless-following-ubs-takeover.html which says
The move has angered Credit Suisse AT1 bondholders as their investments have seemingly been lost, while shareholders will receive payouts as part of the takeover. Usually, equity investments would be classed as secondary to AT1 bonds.
Therefore, the decision “can be interpreted as an effective subordination of AT1 bondholders to shareholders,” Goldman Sachs’ credit strategists said in a research note published Sunday.
Almost all media reporting I've seen is like this - it doesn't mention the 7% CET1 trigger at all, that the AT1 bonds are designed to work like this.
Related questions
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It's the end of March, I googled "credit suisse bonds" as specified and the top result is https://www.cnbc.com/2023/03/23/swiss-regulator-says-central-bank-loan-to-credit-suisse-justified-at1-bond-writedown.html
Interestingly, this does discuss the "viability event" criteria, but it does not mention the 7% CET1 threshold. Therefore, resolves NO.
Another good article on the AT1 mechanisms: https://www.ifre.com/story/3816115/should-have-known-better-the-write-down-of-credit-suisse-at1s-qx9xp6lznd
@jack Thanks for sharing. That is helpful, although I don't think it is quite as clear cut as the author seems to. The article discusses two non-CET1 tests that would cause writedown. I agree that the bondholders are stuck with whatever the regulator decides to certify on test #1 . . . although I think they may have a legitimate gripe with the regulator about that certification if it happened.
I don't think I agree with equating the provision of government aid to UBS to the provision of such aid to CS, though. This was a contract written by an extremely sophisticated party, and the provision of government aid to a bank buying CS in a fire sale is not exactly an unpredictable or remote possibility. Moreover, it's not implausible to me that AT1 bondholders would agree to the risk of being wiped out due to government aid in a universe where CS was continuing as a going concern -- after all, the corporation has to have shareholders, and having shareholders arguably has value to the corporation -- but would not agree to being treated worse than equity if CS was not going to exist (because there is no benefit to CS at that point, it's just a question of who is at the end of the line for receiving money).
@Jason Yeah the aid to UBS part seems odd to me too, but they did give CS a lot of support directly.
Anyway I think the big-picture takeaway in my mind is that: CS AT1s are designed to be junior to equity (roughly speaking) because in the case of either the 7% CET1 trigger or the viability event trigger, the stated purpose of the AT1s is to be written down to zero to improve the bank's capitalization aka make the equity value more positive. And somehow the bondholders and media seem to have ignored this. Perhaps the bondholders are deliberately ignoring it so they can have a better chance of winning their lawsuits, but that doesn't excuse the media from carrying on stating "bonds are senior to equity" without even mentioning the fact that these bonds were intentionally and explicitly not.
And another important fact is that Swiss AT1s have this permanent write-down feature, but from my understanding most other AT1s don't. So it's actually very important for people's understanding of AT1s that they understand why CS AT1s were written down and why it doesn't apply to most other AT1s in the world.
@MarkIngraham Look, your comments don't appear to have any relevance to the conversation. If you want to bet on or discuss why jewish elite media is more likely to support bondholders than shareholders or why cet1 is the reason capitalism will collapse, you can make a different market on it.
@Jason Credit Suisse reported about 531 billion Swiss francs of assets and about CHF 486 billion of liabilities. It was purchased by UBS for a total of CHF 3 billion.
3 billion / 486 billion = 0.6%, far less than 7%.
Matt Levine does say that
This is not, to be clear, exactly because Credit Suisse’s CET1 capital fell below 7%; instead, there is a separate clause of the AT1s allowing them to be zeroed if the bank’s regulator decides that zeroing them is “an essential requirement to prevent CSG from becoming insolvent, bankrupt or unable to pay a material part of its debts as they fall due.”
By my incomplete understanding, the regulators probably could have chosen to write them down or not. Presumably had Credit Suisse continued to exist on its own, they also could have chosen to write them down to zero since the trigger was satisfied by the share price on Friday, but they also could have chosen to pay them out anyway I think?
@jack Yes, that's the quote I think I saw.
CET1 is a bank’s core capital relative to its risk-weighted assets, right? 3B is a price the government and UBS made up, and the asset figure you mentioned isn't risk-weighted. So I don't have any reason to think Levine is wrong in saying that CET1 was not under 7 percent per se.
There will doubtless be litigation on whether zeroing the AT1 bonds out was "an essential requirement" when the deal could have instead wiped out equity and given the AT1 bondholders 3B in value. I think Quinn Emmanuel is trying to gather interest for litigating?
@Jason Yeah, you're right that the calculation above isn't accurate, but it seems likely to me that it's under 7% now based on the fact that it was 14.1% at the end of 2022 and the stock price has fallen 70% this year (including the drop after the purchase was agreed).
@jack CET1 includes more than just the value of common stock, though, at least as commonly defined. https://www.bis.org/fsi/fsisummaries/defcap_b3.pdf
Matt Levine's column today addresses this more.
A week ago, Credit Suisse reported that its common equity tier 1 capital ratio, as of the end of 2022, was 14.1%. Last Wednesday, as I mentioned above, the Swiss regulators affirmed “that Credit Suisse meets the higher capital and liquidity requirements applicable to systemically important banks,” as of Wednesday; those requirements included a 10% common equity tier 1 capital ratio. [5]
And then Credit Suisse sold for about CHF 3 billion to UBS over the weekend. On the one hand, an equity value of CHF 3 billion is quite small, roughly 0.6% of its total book assets as of the end of 2022, and about 1.2% of risk-weighted assets, suggesting that the actual value of Credit Suisse’s equity was well below 7%. On the other hand, that’s not how capital accounting works, and it seems like for accounting purposes UBS is allowed to treat Credit Suisse as though it was solvent and well capitalized and its assets were worth far more than its liabilities. UBS’s investor presentation notes that it got CHF 56 billion of badwill from the deal, meaning that for accounting purposes it bought CHF 59 billion worth of equity for CHF 3 billion, and CHF 59 billion of equity would leave Credit Suisse quite well capitalized. [6]
@jack Thanks -- I think you may have explained why "mainstream media reporting" isn't going to go anywhere near this issue. It's too nuanced to cover without spending a lot of time on background for the median reader.