A Crystal Clear explanation on what's happened at Credit Suisse by Dan Davies, author of Lying for Money
Credit Suisse is being bought by UBS for $3 billion, and there's also 17 billion worth of bonds written down to zero.
The bonds that have been written down to zero are called AT1, which stands for Additional Tier One capital.
They're also occasionally known as
CοCos which is short for Contingent Convertible.
I was actually around at Credit Suisse because Credit Suisse invented these financial instruments in the last crisis. The purpose of these securities is that they are meant to provide capital for a bank that's gone into resolution. So if you were buying these things, you were buying them with a high coupon. They were high yielding instruments and that's why they were popular. But everyone getting into these things knew or should have known that if the bank gets into real trouble, then they could get zeroed out.
What I think has surprised and dismayed people is that these bonds are getting zeroed 📍 while the equity is still getting some value. So 3 billion of purchase price, it's not a great deal of money compared to what Credit Suisse was worth even a few years ago, but it's not nothing.
So it seems that these bonds have become junior to equity. That was something that was regarded as possible. It was in the legal terms of the bond saying there is no guarantee that, you will be senior to equity. But it's always been understood in the market that these bonds would not be zeroed in a situation where equity got anything.
But it turned out that the Swiss government felt that it needed to give equity holders something just in order to get the deal through. But it was able to zero this particular series of bonds, and that's what they've done.
