CS Bonds Worth 22 Trillion Won 'Worthless'... Concerns Over Global Financial Market Shock

CS AT1 Bond Value Hits 'Zero (0)' Shock
Major Asian Banks' Stocks Plunge
Bond Market Freezes... Market Shock Feared

The $17.3 billion (approximately 22.7 trillion KRW) worth of bonds from Credit Suisse (CS), which was acquired by UBS after failing to withstand the aftermath of the Silicon Valley Bank (SVB) collapse in the U.S., has become worthless. As CS investors who purchased bonds considered safer than stocks suffer massive losses, global bond investment sentiment is cooling sharply. There are growing concerns that this move could trigger further bond sales by other banks, becoming a new flashpoint that shocks not only the global bond market but the entire financial market again.

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CS Bond Investors Hit with 'Zero (0)' Bond Value Shock

According to Bloomberg on the 20th (local time), the Swiss Financial Market Supervisory Authority (FINMA) announced in a statement that it would fully write off $17.3 billion worth of Additional Tier 1 (AT1) capital securities to increase the bank's core capital.

This measure was taken as UBS, Switzerland's largest bank, decided to acquire CS for 3 billion Swiss francs (approximately 4.25 trillion KRW). Bond write-off means treating bonds that cannot be recovered as accounting losses, effectively reducing the bond value to 'zero (0)'.

The scale of this bond write-off is expected to be the largest loss ever recorded in the European AT1 market, which totals $275 billion (approximately 360.7 trillion KRW). It far exceeds the $1.44 billion (approximately 1.89 trillion KRW) loss investors suffered when Spain's Banco Popular was absorbed by Banco Santander SA in 2017, which was previously the largest.

The controversy is spreading as losses occur first in bonds, which are generally considered less risky than stocks, due to this CS AT1 write-off. Typically, when a bank faces insolvency, shareholders are hit first. In the order of repayment in corporate bankruptcy, AT1 ranks below corporate bonds but ahead of stocks. However, this move caught AT1 investors off guard as their asset values vanished instantly. Meanwhile, CS shareholders, who hold relatively riskier assets, will receive 1 UBS share for every 22.48 CS shares.

Jerome Legras, Head of Research at Axiom Alternative Investments, expressed concern, saying, "The market will be shocked by the blatant reversal of creditor positions and the decision to sacrifice bondholders to complete the stock transaction."

Asian Financial Stocks Fall on AT1 Write-off... Global Bond Market Freezes

As the asset value of CS AT1 bond investors evaporates, investment sentiment across the global bond market is rapidly cooling. On the same day, European bank stocks listed on major Asian stock markets plunged. In the Hong Kong stock market, UK-based HSBC Holdings fell 6.6%. Newly issued AT1 bonds dropped more than 5 cents, marking the largest decline in six months. UK Standard Chartered (SC) shares also fell 5.6%.

Bank AT1 prices are also falling. One of the riskiest banks, Hong Kong's East Asia Bank's dollar-denominated AT1 with a 5.825% yield, dropped 8.6 cents to 79.7 cents, marking the largest decline ever.

The market fears that CS's bond write-off could become a "tail risk"?a low-probability but high-impact risk?that shakes the global financial sector. Dicky Wong, Research Director at Kingston Securities, said, "What is certain is that the ripple effects of the CS deal will appear in both bond and stock markets," adding, "We still do not know the exposure levels of global and regional banks to AT1." Marvin Chen, an analyst at Bloomberg Intelligence, analyzed, "The CS deal inflicted significant losses on bondholders, and regional investors will begin reassessing their exposure to financial market turmoil and tail risks."

Gary Ng, Senior Economist at French investment bank Natixis, said, "The real risk of AT1 being written off in extreme scenarios raises investor awareness," adding, "Such moves could trigger sell-offs and risk recalibration of AT1 by Asian bond investors and asset managers."

"Losses Were Predictable... Investors Must Take Responsibility"

Some argue that since AT1 investors were fully aware of the risks, they should bear responsibility for the losses. AT1, also known as 'CoCo bonds,' was introduced in Europe after the global financial crisis. These corporate bonds come with conditions that the principal may be forcibly converted into stock or written off in emergencies. As criticism of bailouts grew, investors rather than taxpayers were made to bear losses during bank crises. The decline in bond value due to CS's liquidity crisis was a predictable outcome.

John McLean, Portfolio Manager at Brandwine Global Investment Management, said, "AT1 bondholders knew they were buying high-yield risky assets with a grenade attached," adding, "(This write-off) is absolutely the right move to prevent moral hazard from gradually seeping into the market. These bonds were created for moments like this and are similar to 'disaster bonds.'"