Subject: Re: OT CS Bondholders behind Shareholders
How do you wipe out Cocos [AT1 bonds] and not wipe out equity?

Here's an explanation from the WSJ:

The decision to wipe out Credit Suisse's AT1 bonds has prompted frantic questions among investors. Among them: Why were bondholders wiped out when shareholders weren't?

'What's shocking is that it looks like equity holders will recover better than tier 1 bondholders,' said Justin D'Ercole, co-founder of ISO-MTS Capital Management LP, a fund focused on bank securities. The resulting losses will likely prompt individual and institutional investors to sell similar securities of other European banks, he said.

Traditionally, bondholders rank above equity holders in capital structure. But the Credit Suisse bonds were outliers from other European banks, because they provided for a case where regulators could write them down without wiping out equity holders.

Regulators in the eurozone, which doesn't include Switzerland, clarified that difference with investors Monday.

'Common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down,' said a statement from the European Central Bank's banking supervision arm, the Single Resolution Board and the European Banking Authority.

https://www.wsj.com/articles/c...


More explanation at WaPo:

They're called contingent convertible bonds, or CoCos ' and are often described as high-yield investments with a hand grenade attached. The takeover of Credit Suisse by UBS Group AG included pulling the pin on $17 billion of CoCos, which are also known as Additional Tier 1 (AT1) bonds.

https://www.washingtonpost.com...


So AT1 bondholders are junior to other bondholders, but usually senior to shareholders. But the Credit Suisse AT1 bonds were a little different that way, junior even to sharehoders, but that is not the European norm.

dtb