Losses Starting with Bonds Safer than Stocks
Investors Frustrated... Will the Global Bond Run Continue?
The value of Additional Tier 1 (Additional Tier 1, AT1) securities of Credit Suisse (CS), acquired by UBS, Switzerland's largest bank, has been fully written off, reportedly causing the world's largest bond manager PIMCO to incur a loss of $340 million (approximately 450 billion KRW).
On the 20th (local time), major foreign media outlets cited sources reporting that PIMCO's mutual funds had invested in CS's AT1 securities.
PIMCO's investment loss occurred as Swiss financial authorities decided to fully write off CS's AT1 securities during the acquisition of CS by UBS, following CS's liquidity crisis triggered by the bankruptcy of the U.S. Silicon Valley Bank (SVB). Bond write-off refers to accounting for unrecoverable bonds as losses, and in the case of AT1, the value became 'zero (0)'.
AT1 securities are corporate bonds with conditions that the principal may be forcibly converted into equity or written off in emergencies. They are also called CoCo bonds. Introduced in Europe during the global financial crisis, they were issued as part of measures to have investors bear losses instead of taxpayers during bank restructurings. The write-off of CS's AT1 securities was also processed according to these attached conditions.
However, PIMCO appears to have mostly offset the losses through other CS bonds excluding AT1. They realized valuation gains from Swiss bonds whose value increased after the UBS merger. Currently, PIMCO is known to hold more than $4 billion (approximately 5.2 trillion KRW) in CS bonds excluding AT1.
Nevertheless, dissatisfaction among CS bond investors, including PIMCO, is very high. The main reason is that greater losses occurred in bonds, which are considered less risky than stocks. In the corporate bankruptcy repayment hierarchy, AT1 ranks subordinate to other corporate bonds issued by CS but ahead of stocks. However, when the valuation of AT1 bonds evaporated this time, CS shareholders holding stocks, which are riskier assets than bonds, were able to receive 1 UBS share for every 22.48 CS shares as the merger decision between CS and UBS was made. They received relatively greater protection.
This dissatisfaction is likely to lead to litigation. The global law firm Quinn Emanuel Urquhart & Sullivan is currently discussing possible legal actions with CS AT1 bond investors. In response to strong opposition from CS's AT1 bond investors, the European Central Bank (ECB) announced a policy to have shareholders bear losses before bondholders, unlike the CS case. The Bank of England (BOE) also expressed the same stance. However, in Switzerland, it is expected that this will not be a significant issue because, under Swiss bond regulations, authorities are not obliged to maintain the traditional capital structure.
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