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Tier 1 capital: Difference between revisions
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It became clear in March 2023 when [[Credit Suisse]] finally gave up the ghost, that many in the market, including AT1 investors, didn’t fabulously understand how they worked. | It became clear in March 2023 when [[Credit Suisse]] finally gave up the ghost, that many in the market, including AT1 investors, didn’t fabulously understand how they worked. | ||
===[[Debit Suisse]] and the irate | ===[[Debit Suisse]] and the irate noteholders: co-co go loco=== | ||
Famously, in that panicked | Famously, in that panicked spring weekend in 2023 when it slipped into history<ref>We have a sense [[Credit Suisse]]’s history is not done just yet but that, like Disaster Area frontman Hotblack Desiato, it is merely spending a year dead for tax (and, er regulatory capital) purposes. It may well be back, at least as a high-street banking brand in Switzerland.</ref> the “trinity” of Swiss regulators put a gun to UBS’s head, forced it to absorb [[Lucky]]’s equity (and all the baubles, jewels and hellish instruments of madness and torture embedded in it) — and, by ordinance, directing [[Credit Suisse|Lucky]] to write down its AT1s — called “Perpetual Tier 1 Contingent Write-Down Capital Notes,” and names are sort of important here — to zero. | ||
This — and there isn’t really a delicate way to put this, readers so let’s just come out with it — ''pissed the AT1 noteholders the hell off''. | This — and there isn’t really a delicate way to put this, readers, so let’s just come out with it — ''pissed the AT1 noteholders the hell off''. | ||
Their indignance was largely driven by foundational conceptions of what [[Subordinated|subordinated debt securities]] are meant to be — that is, senior to | Their indignance was largely driven by foundational conceptions of what [[Subordinated|subordinated debt securities]] are meant to be — that is, senior to equity — rather than even a cursory glance at the terms or, goddammit, even the ''title'' of their Notes. This, from the termsheet, gives a clue: | ||
They were fortified in their dudgeon by other central bankers (BOE, ECB, the Fed) unhelpfully announcing, for the record, that that is not how ''they'' would expect to treat [[AT1]]<nowiki/>s (you can just imagine FINMA honchos going “yeah, thanks Pal,” when a central banker from ''Greece'' — yes, yes, ''that'' Greece — went on record as saying “well needless to say we’d never do anything like that. We Greeks are civilised, not like the Swiss!”<ref>This is a paraphrase, and an exaggeration for effect, I freely admit.</ref>) and now ambulance chasing [[Litigation lawyer|litigator]]<nowiki/>s are whipping up even more foment, indelicately trawling [[LinkedIn]] to raise a pitchfork mob of aggrieved investors to go and sue — well, it isn’t clear ''who'' they would sue, or for what, since this was done by legislation — and even the normally mild-mannered financial analyst commentariat has been periodically erupting into virtual fist-fights about what the AT1s do or do not say. | {{Quote|If a Contingency Event, or prior to a Statutory Loss Absorption Date, a Viability Event occurs, the full principal amount of the Notes will be mandatorily and permanently written down. '''''The Notes are not convertible into shares of the Issuer''''' upon the occurrence of a Contingency Event or a Viability Event or at the option of the Holders at any time. <ref>Emphasis added. Full documents [https://www.credit-suisse.com/about-us/en/investor-relations/financial-regulatory-disclosures/regulatory-disclosures/capital-instruments.html here].</ref>}} | ||
They were fortified in their dudgeon by other central bankers (BOE, ECB, the Fed) unhelpfully announcing, for the record, that that is not how ''they'' would expect to treat [[AT1]]<nowiki/>s (you can just imagine FINMA honchos going “yeah, thanks Pal,” when a central banker from ''Greece'' — yes, yes, ''that'' Greece — went on record as saying “well needless to say we’d never do anything like that. We Greeks are civilised, not like the Swiss!”<ref>This is a paraphrase, and an exaggeration for effect, I freely admit.</ref>) and now ambulance chasing [[Litigation lawyer|litigator]]<nowiki/>s are whipping up even more foment, indelicately trawling [[LinkedIn]] to raise a pitchfork mob of aggrieved investors to go and sue — well, it isn’t clear ''who'' they would sue, or for what, since this was done by legislation — and even the normally mild-mannered financial analyst commentariat has been periodically erupting into virtual fist-fights about what the AT1s do or do not say. | |||
Meanwhile, from the investors, lots of jilted lover energy: “How could I ever trust a central banker again?” sort of thing, and lots of “who knew Switzerland was a banana republic?” vibes, too. | Meanwhile, from the investors, lots of jilted lover energy: “How could I ever trust a central banker again?” sort of thing, and lots of “who knew Switzerland was a banana republic?” vibes, too. | ||
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In ordinary times, interest-bearing notes — when AT1s — are much less volatile than common equity. Their market value will not fluctuate much day by day. Their main attraction is their coupon yield. You only benefit from that over time. AT1s reward long-term investment. In ordinary times their return is a linear function of ''how long '' you are prepared to hold them, and therefore how long you fund the bank’s tier 1 capital. | In ordinary times, interest-bearing notes — when AT1s — are much less volatile than common equity. Their market value will not fluctuate much day by day. Their main attraction is their coupon yield. You only benefit from that over time. AT1s reward long-term investment. In ordinary times their return is a linear function of ''how long '' you are prepared to hold them, and therefore how long you fund the bank’s tier 1 capital. | ||
It is different in a bank distress scenario. Here AT1s are unusually vulnerable: this is the very contingency they are designed to protect ''the bank'' against. As the banks capital ratio approaches criticality, their performance more and more to resembles the equity. | |||
''Convertible'' AT1s which, in the worst case, will turn into common equity, will converge on the common equity exactly. | ''Convertible'' AT1s which, in the worst case, will turn into common equity, will converge on the common equity exactly. | ||