Switzerland’s forced merger of Credit Suisse with UBS has caused a real stink. The $250 billion market for contingent convertible bonds is reeling after the stricken Swiss lender was obliged to wipe out its own ones. Yet if the ensuing higher cost of issuing these “CoCo” securities means banks roll over their maturing debt rather than replace it, bank supervisors may still get a silver lining.
has caused a real stink. The $250 billion market for contingent convertible bonds is reeling after the stricken Swiss lender was obliged to wipe out its own ones. Yet if the ensuing higher cost of issuing these “CoCo” securities means banks roll over their maturing debt rather than replace it, bank supervisors may still get a silver lining.
European regulators on Monday mobilised to calm debt investors after Swiss authorities chose to write off 16 billion Swiss francs of Credit Suisse’s Additional Tier 1 CoCos. While these instruments are explicitly supposed to take losses in a solvency crisis, Switzerland left value on the table for shareholders who rank below junior debt.
That convention can lead a weak bank to call a bond to avoid angering creditors and sparking a panic, despite needing to issue at a higher rate. A case in point: only last year the already creaking Credit Suisse chose to redeem a bond. From a regulatory perspective, the presumption that a bond will be called makes it less useful as a source of permanent capital., have chosen not to redeem bonds when it’s not in their interest. That may become more common if yields stay high or rise much higher.
Some 19 bonds are due to be called this year, according to CreditSights, including ones issued by UniCredit
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