The takeover of Credit Suisse by UBS Group AG included pulling the pin on US$17 billion of CoCos, also known as Additional Tier 1 (AT1) bonds. A legacy of the European debt crisis, they’re the lowest rung of bank debt, producing juicy returns in good…
Even shareholders — often the first domino to fall in such situations — salvaged some value from the takeover engineered by Swiss banking authorities, while Credit Suisse’s CoCo holders walked away with nothing. Many bondholders were furious at the move. European regulators hurried to reaassure investors that the Swiss arrangement was an exception. They’re essentially a cross between a bond and a stock that helps banks bolster capital to meet regulations designed to prevent failure.
In simple terms, banks need to meet a minimum requirement for the amount of their own funds and eligible liabilities, more commonly known as MREL, to support an effective resolution in the event of a collapse. If a lender’s capital ratios fall below a predetermined level, then CoCos can be written down. In a normal writedown scenario, shareholders are the first to take a hit before AT1 bonds face losses, as Credit Suisse also indicated in an earlier presentation to investors.
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