HSBC Holdings Plc (HSBC) saw a lower close on Monday. The 6.2 percent drop in value is the largest drop in almost six months. The recently issued Additional Tier 1 or AT1 bond dropped by over 5 cents. Standard Chartered Plc also saw a drop of 7.3 percent while the Hang Seng Index fell by 2.7 percent. The total write-down of Credit Suisse’s AT1 debt has made investors in Asia exercise caution, resulting in European bank shares declining in value, in Asia.
As a part of the bailout by Swiss authorities, Credit Suisse’s AT1 debt was completely written down. So, holders of these bonds will get zero as the bonds have no value. In Switzerland, the terms of the bonds state that they can be written off to zero, in a restructuring.
Credit Suisse AT1 bond holders rank below shareholders. Shareholders will receive 0.76 Swiss francs, equivalent to $0.8191 per share while the bondholders will receive nothing. This write off has spooked the bond market.
AT1 bonds are the riskiest bonds. On Monday, European regulators said that bondholders would face losses after shareholders unlike the situation in Credit Suisse.
In Britain, the Bank of England said that the statutory order in the country entitled AT1 bonds to rank ahead of equity instruments such as shareholders and creditors but were ranked behind tier two bonds in failed banks.
On Monday, data from Tradeweb indicated that AT1 bid prices from the following banks fell by 9-12 points:
BNP Paribas
Deutsche Bank
HSBC and
UBS.
Data compiled by Bloomberg indicated that the perpetual dollar note of Bank of East Asia Ltd declined by 8.6 cents to stand at 79.7 cents. If it remains so, till the end of Monday’s trading, this would be a record decline.
Although Credit Suisse has been bailed out by UBS, there is a large potential fallout in the markets and its repercussions have already been seen on AT1 bonds as well as on UBS stock.
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