Europe’s bank bonds battered after Credit Suisse debt wipeout By Reuters

By Yoruk Bahceli and Lucy Raitano

LONDON (Reuters) -European bank bonds slumped on Monday following the state-backed rescue of Credit Suisse by UBS as a wipeout of some bondholders raised concerns around broader bank capital and also hammered bank shares.

The Swiss authorities’ handling of the Credit Suisse rescue has upended the understanding in the bond market that shareholders would take a bigger hit than bond investors in such a scenario.

Under the rescue deal, 16 billion Swiss francs worth of Credit Suisse’s bonds, known as Additional Tier 1 (AT1) debt or CoCos (contingent convertibles) , will be written down to zero on the orders of the Swiss regulator as part of the merger with UBS, a decision that surprised bondholders.

AT1 bonds – a $275 billion sector also known as “contingent convertibles” or “CoCo” bonds – can be converted into equity or written off if a bank’s capital level falls below a certain threshold.

The write-down to zero at Credit Suisse will produce the largest loss in the $275 billion AT1 market to date, dwarfing the 1.35 billion euros ($1.44 billion) bondholders of Spain’s Banco Popular lost in 2017.

“The takeover of Credit Suisse by UBS was done fast and should have provided reassurance to the market that we haven’t had another bank collapse. However, what it has done is exposed the issues around AT1 bonds,” said Russ Mould, investment director at AJ Bell.

AT1 bonds are a form of deeply subordinated debt that converts into equity or is written off if a bank’s capital levels fall below a certain threshold, depending on the terms of each individual instrument.

Credit default swaps of European lenders – instruments used to insure against exposure to default risks – widened sharply across the banking sector.

In the bond market, Credit Suisse’s Additional Tier 1 (AT1) bonds were bid as low as 1 cent on the dollar on Monday as investors braced for the wipeout.

An index of bank stocks fell as much as 6% in early trading on Monday – hitting its lowest level since November. Bank stocks then recovered some losses throughout the morning and by 1106 GMT were down 1.4%.

CONTAGION RISK

AT1 bonds in other banks tumbled as Credit Suisse’s wipeout raised concerns about investing in such debt issued by other banks.

European supervisors tried to stop a rout in the market for convertible…