AT1 Bond Market Still Vibrant as Ever!
BY: Marc Woernle
On June 12, 2023, UBS completed their acquisition of Credit Suisse, following controversial intervention from the Swiss regulator FINMA, and an effective wipeout of the holders of certain special bond classes, namely “AT1” bonds, after which holders of Credit Suisse equity received 1 UBS share for each 22.48 Credit Suisse shares. This price reflected the economic collapse of one of the largest Swiss banks, ending in the creation of a “consolidated banking group.”
The root of the controversy were clauses written into the Additional Tier 1 bonds, particularly the clause mentioning a “Viability Event,” contained in all the AT1 prospectuses. These clauses mandated that in the event of an extraordinary government assistance (such as that which was extended to Credit Suisse in the form of liquidity on March 19, 2023,) FINMA could authorize or instruct Credit Suisse to write down the value of these bonds in bankruptcy. FINMA did in fact so order that “Credit Suisse’s Additional Tier 1 Capital (deriving from the issuance of Tier 1 Capital Notes) in the aggregate nominal amount of approximately CHF 16 billion will be written off to zero.” This was based on the prospectus, where the relevant condition of “irrevocable commitment of extraordinary support from the Public Sector” was met.
Recently, UBS Group issued new batches of AT1 bonds, and interestingly, there was no provision mandating the writedown of these bonds upon a Viability Event. This reflected investor and public sentiment, which generally spawned several lawsuits against Swiss regulator FINMA. According to Reuters, “European banks have resumed fundraising in the AT1 market, but a UBS deal has been long awaited as a next step for its recovery,” and fix the damage to the alternative bond market created by the Credit Suisse crisis. Furthermore, the key difference between AT1 bonds issued by Credit Suisse, which were written down to 0, and the AT1 bonds UBS issued (announced November 8, 2023), is the Viability Event Clause.
Specifically, this clause now provides that in the event of extraordinary government support, or the dramatic fall of capital levels (a “Viability Event,”) AT1 bonds and other similar instruments will be converted to equity rather than written down according to regulatory mandate. This will prevent investors from being completely wiped out in the case of bankruptcy. Previously issued UBS AT1 bonds have a similar form of this equity provision, according to various prior amendments, pre-dating the Credit Suisse meltdown. The newly-issued AT1 bonds have a structure which fit into a standard understanding of strong priority rules. It is also likely to heal some of the uncertainty created by the Credit Suisse meltdown in the large alternative debt instrument market. The outcome of the various claims against FINMA by Credit Suisse AT1 bondholders remains to be seen, but they have clearly had an effect, as shown by the difference between the two bonds.
Key Sources:
Credit Suisse Group AG, U.S.$2,250,000,000 7.500 per cent. Tier 1 Capital Notes, 71-72 (issued Dec. 11, 2013).
Media Release, Ad hoc announcement pursuant to Art. 53 LR: Credit Suisse and UBS to Merge, Credit Suisse (Mar. 19, 2023).
Press Release, FINMA provides information about the basis for writing down AT1 capital instruments, FINMA (Mar. 23, 2023), https://www.finma.ch/en/news/2023/03/20230323-mm-at1-kapitalinstrumente/ 1.
UBS Group AG, Additional Tier 1 capital (Basel III-compliant), 19-20 (issued Aug. 7, 2015); UBS Group AG, High-trigger loss-absorbing additional tier 1 capital instrument, 92-93 (issued Nov. 13, 2023).
UBS Group AG, UBS completes Credit Suisse acquisition, Ubs, (June 12, 2023), https://www.ubs.com/global/en/media/display-page-ndp/en-20230612-ubs-credit-suisse-acquisition.html.
Yoruk Bahceli & Noele Illien, UBS marks new chapter for AT1 bonds with first since Credit Suisse deal, Reuters (Nov. 9, 2023), https://www.reuters.com/markets/rates-bonds/ubs-sells-first-at1-bonds-since-credit-suisse-takeover-2023-11-08/.