Swiss cheese is full of holes. So is the market for additional tier 1 bonds, following Switzerland’s clumsy rescue of Credit Suisse. On Tuesday, two banks showed AT1s are no longer a no-go zone for issuers — if yields are high enough.
Credit Suisse AT1s — a form of contingent convertible bonds or cocos — were wiped out when UBS was strong-armed into taking over its weaker rival. In theory, ordinary shares should have evaporated first.
The risk of a repeat performance raised secondary market yields and halted issuance. Bank of Cyprus and Spain’s BBVA were the first banks to chance their arms.
The case for refinancing is clear at Bank of Cyprus. The bank was forced to bail in depositors during the 2013 eurozone crisis. It is now in better shape. It will pay its first dividend this year from a forecast return on tangible equity of 17 per cent.
This allows BoC to issue €220mn of new AT1s on better terms. It will buy in a 2018 issue of the securities.
If the lender had not chosen to call or refinance the bonds, the coupon would have reset from 12.5 per cent to 15.6 per cent at the end of the year to reflect higher interest rates. The new issue, with a coupon of 11.9 per cent, reflects the bank’s improved financial outlook and stronger credit profile. BBVA has set a coupon of 8.4 per cent on its own offering of €1bn in AT1s.
In the wider market, European AT1s have tracked bank share prices since March. That correlation now shows signs of breaking down. Confidence in creditor protection is returning, reversing investor losses on AT1s.
There has been much debate over the status of AT1s since Switzerland cancelled $17bn of the securities to sweeten UBS’s purchase of Credit Suisse.
Disgruntled investors are bringing legal proceedings. European regulators have sought to reassure AT1 holders that the bonds remain senior to equity. Some experts warn that national officials can still invert the order.
But the more fresh AT1s that banks issue, the more the Credit Suisse debacle will seem like a one-off.
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