Former executive at UBS Group AG
- Mechanics behind financial institutional groups holdcos and opcos’ use of CoCos (contingent convertibles) and going concern triggers
- Core holders of these instruments, looking at the decision and fallout from Credit Suisse’s (VTX: CSGN) (NYSE: CS) AT1 (additional tier 1) bonds being zeroed and future litigation risk
- The demand outlook for AT1s and Tier 2s, reading through to spreads and how this impacts banks’ cost of funds
- Banks’ abilities to issue new instruments and potential impact on market pricing
- Anticipation of how regulatory bodies will view AT1s and Tier 2s going forwards
What’s the real context behind AT1 [additional tier 1] bonds, which have been in the news recently?
AT1s are essentially the perpetuals and Tier 2s are essentially the non-perpetuals that have a fixed maturity date. They’re still considered subordinate to other debt instruments and, therefore, slightly riskier. What do you think will be the real mechanics behind financial institutional groups using CoCos [contingent convertibles] and going concern triggers, going forwards?
Pre the AT1 crisis, how regularly were you seeing AT1s being called or Tier 2s being issued?
Before calling an AT1, you need to gain the relevant regulatory body’s approval, depending on what domicile you’re in, but obviously these bonds are perpetual in the AT1s, they have no maturity date, so the banks aren’t ever really obligated to repay the principal. What’s the incentive for a bank to call and reissue? Why would a bank do or not do that?
Do you expect to see more frequent calls? How many AT1s would typically be called in a given year?
What are the real mechanics in the issuances between going and gone concern? How are the prospectuses issued and how does FINMA [Swiss Financial Market Supervisory Authority] then differ from the EBA [European Banking Authority] or Bank of England’s stance?
You’ve obviously got these mechanical triggers, but you’ve got the discretionary triggers by the financial supervisory authorities in their given domiciles. On the discretionary triggers, how much are they down to regulatory or governmental regime interpretation? You mentioned that FINMA obviously chanced some of its stance towards it, but what’s quite interesting, given the AT1 fallout from Credit Suisse, is the Tier 2s have the same language, but they weren’t touched or written down or zeroed. Why is that?
How much do you think FINMA’s decision was political? You’d obviously had a lot of Middle Eastern money flow into Credit Suisse as a signal of support, one quarter prior.
Are clients typically directed towards AT1s in banks? If they’ve got wealth management or private banking clients, would they say, “I would recommend holding this because of X, Y and Z?”
You said a typical minimum amount of issuance is CHF 200,000. What would be a typical yield that you’d see in an AT1 vs a Tier 2? What would the spreads be?
In February 2023, the average yield on one of the AT1 indexes was 7.8%, and then as of Tuesday 28 March, the average yield across some of the assets was as high as 13.5%. That’s obviously quite high and I think what’s more interesting is the market is almost in limbo, and there are so many questions around the actual value of these products and then, subsequently, the rest of the liability structure lingers on this value being placed on the AT1s. Where do we see risk premia trending? How can you assess fair value when you have this kind of discretionary element, which is always going to be subject to a given authority’s interpretation of that moment in time?
How actively would you say AT1s or Tier 2s swap hands before the crisis? Obviously they’re not actually swapping hands at the moment.
When do you see banking players starting to be comfortable with new issuances? Obviously, we’ve said it could be sharp, no one has really come to market. Do you see it as a 6-12-month time horizon? Do you see some divergence between a Swiss financial institution and a European or UK institution being able to issue? The European Union on 30 March 2023 said that it will respect creditor hierarchy, and the days after the original zeroing of the AT1s, the EBA also said that it would not be treating the seniority waterfall in the same way that FINMA did.
Is the market going to be sharper for second-tier banks in Switzerland such as Julius Baer or Vontobel? They’ve obviously got much less scale. With a bank such as UBS, you can see some attractiveness and it obviously has a lot of regulatory support behind it at the moment. For those slightly smaller players, how is that going to impact them and their cost of funds?
Focusing on the point of litigation risk, on the UBS analyst call, post the UBS-Credit Suisse merger being announced on 19 March 2023, the bank said that FINMA made that decision, but who would be responsible for future litigation? Let’s single out the UBS and Credit Suisse shareholder dissatisfaction dynamics. Would UBS potentially have some exposure to some litigation against those AT1s being zeroed? It would have been involved in discussions with FINMA.
Is there anything that you’ll be watching for on the markets, going forwards, or anything we haven’t had a chance to cover today that you find very interesting?
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