Source: Broker China Author: Liu Xiaoyou, Li Yingchao

The closure of Silicon Valley Bank of the United States and signatory banks is ahead, and the market is paying close attention to whether the current crisis of Credit Suisse will cause further risk spillover into the US and European banking industries.

Broker China's reporter combed through Bloomberg terminal data and found that as of March 20, Credit Suisse (parent company and subsidiary companies side by side) had a total debt balance of over 150 billion US dollars. In its debt map, corporate bonds account for an absolute share (few or no loans, priority bonds, and treasury bonds), with more than 3,800 surviving corporate bonds and more than 1,200 holders.

According to the current Swiss Financial Market Supervisory Authority, after the Swiss government supports UBS's acquisition of Credit Suisse, Credit Suisse Additional Tier 1 bonds (hereinafter referred to as “AT1 bonds”) with a face value of about 16 billion Swiss francs (about 17.2 billion US dollars) will be completely written off. According to the reporter's estimate of the balance of surviving bonds mentioned above, AT1 bonds, which will become “worthless”, account for about 11% of Credit Suisse's total corporate bonds.

Information on AT1 bonds extracted by the brokerage firm China reporters can only confirm investors, showing that global asset management giants such as BlackRock, Blackstone Group, Pacific Asset Management, American Teachers Retirement Foundation, First Trust, National Bank of Australia, and Swiss Life Insurance are all frequently on the list of holders on the list.

For investors in this part of AT1 bonds, it is inevitable that trust will be greatly discounted. There are also financial market professionals who have exclaimed that “settlement rules have collapsed.”

Who is the AT1 loser? How big is Credit Suisse's debt market?

In the bailout plan for Credit Suisse, an unconventional practice caused an uproar: 16 billion Swiss francs (about 17.2 billion US dollars) of Credit Suisse AT1 bonds were cleared by the Swiss Financial Supervisory Authority.

There is little precedent for this in the global market. The last time this was done dates back to 2017. At the time, Bank Santander of Spain bought the Spanish Public Bank under the leadership of the government. In this merger and acquisition case, the securities held by the shareholders and AT1 bond holders of the Spanish Public Bank were also fully accounted for.

Who is the “underdog” of AT1? The market is watching.

A reporter from the brokerage firm China checked Bloomberg's terminal and found that it is not possible at this stage to summarize which institutions are involved in all of Credit Suisse's AT1 creditors. The reporter's extraction of AT1 bonds, many of which can only determine investors, shows that global asset management giants such as BlackRock, Blackstone Group, Pacific Asset Management, American Teachers Retirement Foundation, First Trust, National Bank of Australia, and Swiss Life Insurance are all frequently on the list of holders. According to the reporter's incomplete statistics alone, the number of holders of Credit Suisse AT1 bonds that can confirm holders' information has reached more than 360.

Another list of holders of an AT1 bond worth about 200 million US dollars shows that more global investors are participating, including Longao Bank, Ruiwan Tongbo Holdings Co., Ltd., GAM Holdings Co., Ltd., Generali Insurance, Bank Zurich, etc.

AT1 bonds are just one part of Credit Suisse's debt landscape. Looking at the overall debt perspective, Bloomberg terminal data shows that as of March 20, the total debt balance of Credit Suisse (parent company and subsidiary companies side by side) exceeded 150 billion US dollars. In its debt map, corporate bonds account for an absolute share (few or no loans, priority bonds, and treasury bonds), with more than 3,800 surviving corporate bonds and more than 1,200 holders.

Major holders of all debt include Allianz Insurance, BlackRock, Fidelity (FMR), Vanguard (Vanguard), and American Capital Group. In addition, Los Angeles Asset Management (TCW Group), Invesco, J.P. Morgan, American Teachers Insurance and Pension Association, Bank of Switzerland, Deutsche Bank, Royal Bank of Canada, First Trust, etc. also appeared in the top 20.

Settlement rules collapse, trust crisis or spread

A number of interviewees conveyed a common understanding to the brokerage firm China's reporter: the profound impact of the Credit Suisse AT1 incident will go beyond the merger and acquisition case itself, and this impact is likely to be negative. Since investors who have purchased Credit Suisse AT1 bonds are almost all large asset managers, clearing AT1 bonds is equivalent to the financial institution's own risk being transmitted to the main participants in these financial markets through the bonds.

As soon as the plan for AT1 bonds to be liquidated came out, arguments about a crisis of trust were sparked, and the price of AT1 bonds in Asia plummeted on the same day.

Some professional institutional investors are concerned about this. “We think it's still too early to announce victory. UBS's merger and acquisition of Credit Suisse may lead to legal action, and shareholders won't be happy to see stock valuations drastically reduced. AT1 bond holders, on the other hand, may be upset because they have lost their money and shareholders will at least be left with “a few or two pieces of broken silver.” In theory, AT1 bond holders should have priority over bank assets over shareholders.” Standard Chartered Wealth said.

Zhou Hao, chief economist of Cathay Pacific Junan International, wrote that according to the design principles of AT1 itself, there is nothing wrong with the government supporting AT1's “100% reduction” to increase the core capital ratio to meet regulatory requirements, but UBS's acquisition made shareholders' payout rank higher than debtors' talents, which is the key to causing dissatisfaction.

“Even if there is no direct deterioration in the quality of the bank's own assets, financial risk may still be directly transmitted to the broader financial system through some kind of 'impairment' or even 'zeroing'. Although asset management agencies are 'priced by market capitalization' in real time, such an unexpected impairment may bring about a wider “crisis of trust.” According to Zhou Hao's article.

There are also large asset management professionals responsible for cross-border investment who did not wish to be named, reminding the reporter from a practical level to “pay attention to portfolio income.” In his opinion, many AT1 bond investors still hold other bonds worth far more than AT1. However, these bonds will appreciate when UBS's bailout merger is reached. This part of the appreciation may be able to offset the holders' losses on AT1.

On March 20, local time, Credit Suisse plummeted 52.98%, closing at $0.94; UBS Group rose slightly by 3.35% to close at $18.81.

The reporter checked the 2022 annual report published on Credit Suisse's official website. The data showed that the total assets of Credit Suisse (subsidiary caliber) were 531,358 billion Swiss francs, and the total shareholders' equity was 45.129 billion Swiss francs. Last year, Credit Suisse's net revenue was 14.921 billion Swiss francs, a sharp decrease from 2021's 22.696 billion Swiss francs, a decrease of 7.775 billion Swiss francs, or 34.26%. By the end of 2022, Credit Suisse managed assets of about 1.29 trillion Swiss francs, or 9.6 trillion yuan.

The banking landscape in Europe and the US is changing

At a time when the banking industry in Europe and the US is in turmoil, international credit institutions that are valued by investors are also changing their ratings for bank groups in the midst of turmoil.

According to Moody's latest ratings report, all long-term ratings of Credit Suisse Group and its subsidiaries are included in the upward revision watch list, with the exception of Credit Suisse's B1 (hyb) preferred stock ratings for Tier 1 Capital Bonds (AT1). Meanwhile, the Moody's report confirmed that UBS Group's unsecured debt rating was A3, and the outlook was downgraded from “stable” to “negative.”

Moody's believes that after UBS plans to acquire Credit Suisse, Credit Suisse's creditors will benefit from enhanced liquidity and downside protection.

Meanwhile, the situation of regional banks in the US remains volatile. Standard Chartered Wealth Management analysis points out that after the Silicon Valley bank bankruptcy incident broke out, the market focus increasingly turned to where these banks exposed commercial real estate (especially office buildings). Commercial real estate prices fell in the fourth quarter due to soaring financing costs. “The volatility of the bond market has risen sharply in the past few days. This has increased uncertainty in the real estate sector and may exacerbate the liquidity problems of some regional banks.” The Standard Chartered Wealth Management team said.

Currently, global central bank regulators, including the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Bank of Canada, and the Swiss Bank of Switzerland, have indicated that in order to mitigate the lack of liquidity in the global financing market, they will adjust the dollar liquidity instrument auctions that were originally held every week to be held on a daily basis.

Some market sources pointed out that central bank adjustments in many countries are aimed at easing the concerns of some investors that the Credit Suisse merger and acquisition case may increase liquidity pressure in the banking industry in the next few days.

edit/lambor