The run-off of $17 billion in Credit Suisse bonds has cast doubt on further issuance in the high-risk bank debt market, with some of Asia’s largest banks considering pausing sales.
Major banks in Japan, Singapore and Hong Kong are putting new additional tier 1 (AT1) bond transactions on hold until market conditions stabilize, according to people familiar with the plans.
The hiatus follows three days of turmoil sparked by the decision to write down the value of Credit Suisse’s AT1 bond to zero as part of the bank’s takeover by Swiss rival UBS, while shareholders paid $3.25 billion. received. AT1s are a class of debt designed to take losses when institutions run into trouble, but are widely believed to take precedence over equity on the balance sheet.
Regulators in the Eurozone, UK and Hong Kong have stressed that they will not follow Swiss authorities in disrupting the usual hierarchy of bank creditors.
Still, prices in the $260 billion AT1 market have plummeted this week. Analysts and investors have warned that buyers are likely to demand significantly higher borrowing costs, potentially creating a “zombie market” where banks are reluctant to issue new debt to refinance older bonds.
“It makes no sense for Asian banks to issue at such high interest rates, but I do expect the fundamentally stronger banks to issue AT1s again when the market stabilizes,” said Nicholas Yap, chief Asia credit desk analysts at Nomura.
MUFG and SMFG, two of the three banks responsible for the bulk of AT1 issuance, were expected to issue AT1 bonds in April and were already gauging investor interest when the Credit Suisse crisis erupted.
Those with knowledge of the planned sales say the banks may now have to adjust their terms or pause the issuance, depending on how badly investor sentiment has been damaged by the Swiss bank’s outage.
Bond traders said the pipeline for new AT1 issuance in Hong Kong is now empty and is unlikely to restart until the second half of the year.
The fallout from the Credit Suisse deal “changes the whole nature of the [AT1] market, and I think the ability to spend going forward is probably close to zero,” said Greg Peters, co-chief investment officer of PGIM Fixed Income. “Basically, it’s a zombie market moving forward in my mind.”
AT1s were designed in the aftermath of the 2008-2009 financial crisis as a way for bondholders to bear a larger share of the losses in failing banks and avoid taxpayer-funded bailouts. The bonds are perpetual and have no predetermined maturity, although they are generally repaid once an initial “non-call” period expires and refinanced with new issues. Investors appreciate the flexibility to get their money back and choose whether to buy new bonds.
Part of the reason for the price drop is that investors are factoring in the “extension risk” of banks defaulting on their bonds, said Lotfi Karoui, chief credit strategist at Goldman Sachs.
UniCredit, Crédit Agricole and Barclays are among the European banks with “call” dates this year. But looking at the broader AT1 market, “2023 is relatively on the benign side,” Karoui said, with “no imminent refinancing needs.”
“I would probably expect issuers to act rationally and wait for funding costs to come down” before rolling their AT1s, he said, adding that about 60 percent of Europe’s current stock of AT1s would reach their first call date before year-end. 2026.
At least one Singapore-based bank has halted issuance, a person familiar with the market said.
DBS, Singapore’s largest bank, said it had no AT1 issuance plans. The bank assured investors that it was well capitalized and that exposure to Credit Suisse was “insignificant”. DBS has issued a number of AT1 securities in the past.
OCBC, another top Singapore bank, did not respond to a request for comment.
Most analysts argue that the Swiss authorities’ decision to eradicate AT1 holders should not be seen as a precedent for other jurisdictions. Yet it has led to nervousness in the world bank bond market.
A Chinese state-owned bank’s risk officer said the lender would be more careful about pricing write-down risks on AT1s, and would no longer “blindly believe” that a Swiss-style 100 percent write-down could never happen.
A Hong Kong-based asset manager with a large presence in China said the global AT1 bond market was effectively “dead” for the short term. “Any bank planning a new issue will have to offer an impossibly high premium to attract investors afterwards.”
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