AT1 Bonds from Credit Suisse: Investors May Be Able to Recover their Losses

UBS’s move to acquire Credit Suisse was good news for Credit Suisse shareholders, but bad news for AT1 bondholders. Under the new UBS deal, shares of the Additional Tier 1 (AT1) debt will be written down to zero–i.e., rendered worthless. UBS acquired Credit Suisse for nearly 60% less than it would have paid had the bank not been on the brink of collapse. AT1 bondholders will collectively lose an estimated $17.3 billion. Meanwhile, UBS is paying Credit Suisse shareholders $3.23 billion.

Traditionally, bondholders receive payments before shareholders. Banks do not have to pay AT1 bondholders, which may come as a surprise to some bondholders. This makes AT1 bonds attractive to banks since they do not count toward the bank’s liability. The Wall Street Journal reports that if AT1 bonds could not be wiped out, “the math for UBS shareholders didn’t work.”

How Do AT1 Bonds Work? 

AT 1 bonds come with plenty of risks with a limited upside.

• AT1 bonds often come with complex terms, making them difficult for investors to fully understand.
• Stock brokers and investment advisers may emphasize that these types of bonds come with particularly high yields, without mentioning the risk for losses.
• AT1 bonds are perpetual, meaning they do not have a maturity date. They are supposed to pay out interest for the duration of their existence, but the bank may “call” them, or redeem them, typically after two to five years. Investors, however, do not have the power to redeem their bonds.
• If the bank faces financial struggles, it can stop paying interest on AT1 bonds or reduce the payouts.