The Great AT2 Escape | Financial Times


The biggest winners from the Credit Suisse implosion (apart from FTAV’s swag shop) are clearly holders of the bank’s AT2 bonds. We can’t quite say why though.

The $16bn Credit Suisse Additional Tier 1 bonds are by now famous, with Switzerland’s decision to take them out back and shoot them as a political sacrificial lamb to improve the combined UBS-CS financial metrics earning the country the wrath of aggrieved investors.

Yet, weirdly, Europe’s new “banana republic” and “pariah” has (so far) decided not to touch Credit Suisse’s $2.5bn Additional Tier 2 capital bond — despite it also being explicitly bail-in-able.

That has led to this absolutely beautiful chart, with the bond (which matures on August 8) going from trading at 98 cents on the dollar last week to a low of under 50 cents and back to 96 cents at pixel time as it appeared to escape the CS obliteration scot-free.

AT2 bonds are a lesser-known, smaller part of the “contingent convertible” bond market.

In the lump-eating rankings, AT2s get hit after AT1s, but the main difference is that only perpetual bonds are allowed to be classified as AT1. AT2 bonds have a maturity date, but are still explicitly designed to be bailed in or wiped out in a crisis.

And as you can see, Credit Suisse’s AT2 has very similar terms (full prospectus here) to the AT1 bonds that were completely vaporised.

Specifically, the stipulated “write-down event” is similar, with the bond prospectus stating that the Swiss financial regulator can determine that the bond needs to be wiped out if Credit Suisse requires “extraordinary support from the public sector”.

The Swiss relied both on this (controversial) contractual interpretation and an (even more controversial) emergency ordinance to write down the AT1s. So why didn’t they do it with the AT2 bond, which was chunky and maturing in less than half a year?

The best/funniest argument we’ve heard is that they just forgot about this issue, and by the time someone realised it was best to just pretend this was all deliberate. Better explanations in the comments below.



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