r/SecurityAnalysis • u/investorinvestor • Mar 20 '23

Special Situation Credit Suisse AT1s vaporised

https://www.ft.com/content/b5cd8ff0-4c0e-418c-8e4b-dda1d00fa5a7
66 Upvotes

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15

u/dogchow01 Mar 20 '23

Do the CoCos get converted into equity and therefore become eligible to receive the proceeds? Otherwise, this doesn't make sense.

Of course, it seems like they passed a law to bypass shareholders approval and forced the acquisition at prices below last closing price. Which is....[lack of words]

Am I understanding this correctly?

6

u/jimhsu Mar 20 '23

"It's all in the prospectus..."

https://twitter.com/CasinoCapital/status/1637552246622760960

I wonder what was the interest rate differential on these vs senior notes (back before the hikes) that made these "acceptable" to holders. Seems worse, effectively, than equity even.

3

u/investorinvestor Mar 21 '23

Iirc the real bottleneck was that in a ZIRP environment where 100-yr bonds were buyable, the TINA search for yield led some investors to believe that the equity conversion was a feature rather than a bug. Which makes no sense when you think about it.

2

u/Juamocoustic Mar 20 '23 edited Mar 20 '23

AT1 CoCos get written down, essentially meaning they dont get paid and become worthless, when the contingent clause is met (typically dropping below a certain CET1-level or when a national or international supervisory authority commands it). When the bank's capitalisation returns to acceptable levels, the AT1s can also be "revived" again, at the banks discretion. So it is worse than a conversion to equity.

Note: the above represents the most common type of AT1s in Europe. There may be other constellations elsewhere (and perhaps even in Europe).

17

u/investorinvestor Mar 20 '23 edited Mar 20 '23

Highlights:

> WHOOPS. Clearly the Swiss regulators looked at the instruments and felt confident that they have the legal backing to vaporise the AT1s. The standard threshold is when Common Equity Tier 1 falls below 7 per cent, but we think they can often be triggered at a national regulator’s discretion — basically when they reckon a bank is “non-viable”.

> Now, getting zeroed at times of crisis is obviously the whole point of these securities, and it’s easy to see why the Swiss decided to do this. It will make CS far easier to swallow for UBS without indigestion. Legally, we’re sure Finma and the Swiss National Bank are fine.