Switzerland's decision to wipe out $17 billion of Credit Suisse's so-called additional tier 1 debt as part of the government-brokered rescue of the troubled bank by UBS Group AG has made it a lot tougher for other Swiss lenders to issue those types of risky bonds, said a top Vontobel Holding AG executive.
"The disadvantage is if we were to go out and do an AT1, it would be extremely difficult or it would be with very high margins," Thomas Heinzl, the Swiss bank's chief financial officer, said at Bloomberg's Future of Finance conference in Zurich. "It's a sensible instrument to be used," he said, "so this is something that we as banks are suffering from."
Banks around the world have issued billions of dollars of AT1s, which are deeply subordinated bonds that are supposed to take losses if a lender runs into trouble and help avoid a repeat of the taxpayer-funded bailouts that followed the 2008 financial crisis. With markets mired in low interest rates in previous years, investors snapped up the notes that offered higher yields than less risky securities.
"An investor who enjoyed the high coupons and who read the prospectus should have been aware that this could have happened," Yves Robert-Charrue, a top executive at Julius Baer, told Bloomberg's Francine Lacqua at the conference.
"The problem was," he continued, particularly in Asia and the Middle East, "a lot of clients had invested in AT1s not being really conscious of the risk."
"I think that triggered a lot of the negative perception that the Swiss financial center currently is suffering," said Charrue, who oversees operations in Switzerland, Europe, and the Middle East and Africa.
Banks in other jurisdictions have since issued such debt, yet Swiss lenders probably won't see a negative impact if it takes them longer because the AT1 portion of their overall reserves is limited, said Marni McManus, Citigroup's country officer for Switzerland.
Such bonds are designed to be written off or convert to equity if a bank's capital levels plunge. But critics of the write-down argue it was an unfair and disproportionate move that put shareholders before bondholders, contrary to the conventions, and has triggered a spate of lawsuits against the Swiss banking regulator, the Financial Market Supervisory Authority, known as Finma.
Defenders of Finma's decision point out that the risk of a write-down was clearly laid out in the bonds' fine print. And Daniela Stoffel, the Swiss State Secretary for International Finance who spoke at the conference, defended the UBS takeover as the best option.
All the alternative scenarios for Credit Suisse "would have been worse," said Stoffel.
