European bank supervisors step in to stem rout in bonds

By Francesco Canepa and Andy Bruce

FRANKFURT (Reuters) -European supervisors tried to stop a rout in the market for convertible bank bonds on Monday, saying owners of this type of debt would only suffer losses after shareholders have been wiped out – unlike what happened at Credit Suisse.

Regulators in the European Union and Britain were reacting to a decisions by Swiss authorities to write off Credit Suisse’s Additional Tier 1 (AT1) bonds even as stockholders received shares in UBS.

The EU regulators – the European Central Bank, the European Banking Authority and the Single Resolution Board – said they would continue to impose losses on shareholders before bondholders.

“This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions,” they said in a statement.

The comments helped the price of bank bonds cut losses and were echoed by the Bank of England shortly after.

“Holders of such instruments should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy,” the Bank of England said in its statement.

All institutions welcomed, however, “the comprehensive set of actions taken yesterday by the Swiss authorities” to save Credit Suisse, using the same phrase in their separate statements.

In a package engineered by Swiss regulators on Sunday, UBS Group AG will pay 3 billion Swiss francs ($3.2 billion) for 167-year-old Credit Suisse Group AG and assume up to $5.4 billion in losses.

Under the deal, the Swiss regulator decided that Credit Suisse’s additional Tier 1 bonds – or AT1 bonds – with a notional value of $17 billion will be valued at zero, angering some of the holders of the debt who thought they would be better protected than shareholders in the takeover deal announced on Sunday.

AT1 became popular with banks and market participants in the past decade as lenders looked for ways of building up capital to meet supervisors’ requirements without issuing equity.

“Additional Tier 1 is and will remain an important component of the capital structure of European banks,” the EU regulators said in their joint statement.

Credit Suisse’s AT1 bonds contained a clause allowing Swiss authorities to write them off if the bank became unviable, regardless of what happens to the shares.

This clause is not typically included in EU bonds, analysts said.

(Reporting by Francesco Canepa, Editing by Louise Heavens and Nick Zieminski)