The $256 billion (approximately 33.5 trillion yen) “Other Tier 1 bonds” (AT1 bonds) market isStill reeling from the shock of the Credit Suisse Group AG being worthless.
The decision to render the bank’s AT1 bonds worthless as part of the Credit Suisse emergency bailout has sparked controversy, despite a flurry of rhetoric from bank regulators and politicians seeking to calm the market. Yields on AT1 bonds have remained near record highs, fueling fears that the market’s practice of buying back AT1 bonds will break down in the coming months, leaving investors with debt.
“I doubt banks will be able to issue new AT1 bonds anytime soon,” ING credit strategist Timothy Lahill said in a note. “The AT1 bond market remains up in the air, leaving questions surrounding the actual value of the product and, by extension, the rest of the debt structure,” she wrote.
An index of AT1 bonds issued by European banks yielded 13.5% as of Thursday. It fell slightly from the all-time high it hit after the Credit Suisse bond went worthless. It was down to 7.8% at one point in February.
Index of AT1 bonds issued by European banks
Source: Bloomberg
Banks issuing AT1 bonds face difficult decisions to balance the interests of creditors, equity holders and regulators. Given the high refinancing costs, it may be cheaper to forgo the first call date (the earliest date an issuer can redeem before maturity) and pay coupons on outstanding bonds.
“If not spillovers, the stresses and concerns will continue,” said Sebastian Barthélémi, head of credit research at Kepler Chevrew. “It will take some time for the market to digest the Credit Suisse case and fully relax,” he said.
news-rsf-original-reference paywall">Original title:AT1 Yields Near Record Show Lasting Damage From Credit Suisse(excerpt)