Credit Suisse's 2022 warnings of an impending fall off a fiscal cliff materialized over the weekend, with former rival UBS brokering an emergency takeover, paying 60% less to buy Credit Suisse than it would have just days before the sale.
For Credit Suisse stockholders, this translates into a 60% loss (1.86 Swiss francs on Friday down to 0.76 francs after a weekend collapse), but for the firm's contingent convertible ("CoCo") bond owners, also known as additional tier one (AT1) bond holders, the damage will approach a total loss.
Contingent convertibles—mainly seen in Europe—work by setting a strike price that once reached may result in the bond converting into stock or equity. They are considered high-yield, high-risk products that may sometimes be called enhanced capital notes or ECN's.
For instance, FINRA referenced risk exposure associated with AT1 bonds in a March 2022 regulatory notice, reminding industry brokers of their sales practice obligations for complex products.
Ordinarily, catastrophes such as Credit Suisse's downfall would trigger support for exposed bondholders, but in the case of Credit Suisse, the Swiss National Bank announced a "complete write-down" of all AT1 bonds to, presumably, offset losses to other lines of business.
AT1 bonds were created following the 2008 financial crisis with the objectives of allowing banks to absorb losses and lessen the likelihood of taxpayer-funded bailouts by allowing banks to convert debt in the form of AT1s into stock; however the very nature of AT1 bonds make these offerings riskier than standard non-structured products, by allowing AT1s to suffer the fate of complete write-downs, which is the path the Swiss authorities have taken.
Some wealth managers avoided AT1s specifically for this reason. Van Lanschot Kempen co-head of credit Joost de Graaft said he avoided Credit Suisse's AT1 bond offerings because he was "afraid of something like this." Other money managers are worried the dramatic write down strategy in Switzerland might set a dangerous precedent for AT1 bonds throughout the industry.
For instance, the Invesco AT1 Capital Bond exchange-traded fund (ETF) and WisdomTree AT1 ETF both fell in trading immediately following the Credit Suisse news. Reuters reported American fund giant, PIMCO, lost $340 million due its holdings of Credit Suisse AT1 bonds.
Because of the increased risk posed by AT1 bonds' conversion feature and potential exposure to write downs, they are generally unsuitable for retail investors.
If you invested with any broker or financial adviser in Credit Suisse's AT1 bonds, and stand to suffer significant losses as a result of their complete write-down, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.