Credit Suisse 17billion AT 1 Bonds hit
- March 21, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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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.