The wipeout of $17bn (£14bn) in Credit Suisse (CH:CSGN) additional tier 1 (AT1) debt as part of its takeover by UBS (CH:UBSG) has been met with much angst, but there is limited evidence that aggrieved bond investors will force up banks’ cost of capital to unprecedented levels.
AT1 bonds, typically classed as contingent convertibles, or cocos, are designed to be wiped out or convert to equity at times of financial stress. UK banks were early adopters following the financial crisis, and, as of 2018, more than a third of outstanding European coco debt belonged to UK issuers.
While AT1s are one of the riskiest forms of debt – as shown by the elevated coupons that they offer – as bonds, they traditionally rank higher in the capital hierarchy than equity. The Credit Suisse deal upended that order once again, prompting dismay and a back-and-forth on social media over the precise wording of the bonds’ prospectuses.