Credit Suisse 17billion AT 1 Bonds hit

Subject : Economy

Section: Monetary Policy

Concept :

Swiss authorities brokering Credit Suisse’s rescue merger with UBS have said 16 billion Swiss francs ($17 billion or Rs 1.4 lakh crore approximately) of its Additional Tier 1 (AT1) debt will be written down to zero.
AT1 bond holders rank below those holding equity stakes in Credit Suisse who can expect to receive 0.76 Swiss francs per share.
The writing down of the $17bn AT1 bonds to zero could result in chaos to the $ 275bn size of AT1 market in Europe.

Additional Tier-I Bonds

AT-1 bonds are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
There are two routes through which these bonds can be acquired:
Initial private placement offers of AT-1 bonds by banks seeking to raise money.
Secondary market buys of already-traded AT-1 bonds.
AT-1 bonds are like any other bonds issued by banks and companies, but pay a slightly higher rate of interest compared to other bonds.
These bonds are also listed and traded on the exchanges. So, if an AT-1 bondholder needs money, he can sell it in the secondary market.
Investors cannot return these bonds to the issuing bank and get the money. i.e there is no put option available to its holders.
However, the issuing banks have the option to recall AT-1 bonds issued by them (termed call options that allow banks to redeem them after 5 or 10 years).
Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value.
AT-1 bonds are regulated by RBI. If the RBI feels that a bank needs a rescue, it can simply ask the bank to write off its outstanding AT-1 bonds without consulting its investors.