(Bloomberg Opinion) -- Credit Suisse Group AG’s junior bond holders are not happy. The UBS Group AG takeover, orchestrated by the Swiss government without the blessings of shareholders on both sides, will trigger a complete write-down of their $17.3 billion worth of Additional Tier 1 notes. Some are considering legal action.
Losses of this magnitude areunsettling to markets already shaken by the latest banking crisis. As such, it is of public interest to askwho are the owners of these risky bonds, introduced after the global financial crisis?
It is a puzzle thatneeds to be resolved.
Big money managers such as Pacific Investment Management Co.andInvesco Ltd.are among the largest holders, owning around $807 million and $370 million, respectively. BlackRock Inc. hadabout $113 millionat the end of February, although the firm has reduced some of its holdings in recent weeks. Elsewhere, funds managed by Lazard Freres Gestion and GAM Investments were also exposed.
The Middle East has formed deep ties with Credit Suisse. In 2013, Qatar converted over $4.5 billion of a special type of debt into AT1 bonds, although it is unknownwhether the Gulf state still owned any of them.
Or how aboutCredit Suisse’s own employees? For years, senior executives were paid in part in AT1notes, Semafor reported. The news outlet did not offer concrete figures.
Beyond these, who owns the bulk of those bonds is asopaque as how the takeover deal was struck.
Fortunately, banks are unlikely candidates, in that they are heavily penalized for owning peers’capital instruments. Bloomberg Intelligence offered a good example. In Japan, investing in another lender’s AT1 notes carries a 1,250% risk weight. This means banks must hold at least $1 of their own equity for every dollar of AT1 notes they have in their securities portfolio.
Mom-and-pop investors should also be largely spared. In many jurisdictions, retail investors are not allowed to buy AT1 notes because of their complexity. Hong Kong, for instance, is obsessed with consumer protection. Bonds traded over-the-counter —themarket norm—are off-limits. As of 2020, only 64 out of the1,574bonds outstanding were offered to the public. As such, any exposure is likely to be indirect — probably through people’s mutual funds or exchange-traded-funds holdings — and relatively muted, given that these instrumentstend to be diversified.
This leads us to the ultra-rich. Wealthy individuals as well as small to midsized family officesin Hong Kong and Singaporehave gobbled them up, and a lot of them are “in shock,”according toThe Financial Times. JPMorgan Chase & Co. concurs, commenting in a recent reportthat “we do not have data on who holds AT1, but we expect it to be held by institutional investors as well as private bank clients.” Just like notes issued by Chinese real estate developers, AT1 bonds are tempting in that they offer juicier coupon payments than plain-vanilla deposits. One Credit Suisse bondissued last year that waspaying 9.75%was particularly popular.
For years, Asia’s wealthy have beenthe profit center at Credit Suisse’s crown-jewelwealth management division. They have beenshaken by thisfallout, unsure for weeks whether their money was safe with the Swiss bank. Now, some may be looking atactual losses —tothe tune of billions of dollars. Do they still have faith in their private bankers?
Credit Suisse is putting on a brave face, urging calm among its employees and carrying on with its annual investment conference in Hong Kong this week. (Media has beenuninvited, to this columnist’s dismay).But deep down, its senior executives must know thatthecrazy, rich, anxious Asiansare not happy, andtheSwiss brand is not as prestigious as before.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.
