Source: Wall Street author: Han Xuyang

In the wake of the Credit Suisse crisis, all the problems in the high-risk bank bond market have been exposed, and some large Asian banks may suspend issuing AT1 bonds.

Major banks in Japan, Singapore and Hong Kong are suspending new issuance of additional tier one capital bonds Additional Tier 1 (AT1) until market conditions stabilize, according to people familiar with the matter quoted in the media on Wednesday.

At least one Singaporean bank has stopped issuing, according to people familiar with the matter. DBS, Singapore's largest bank, said it had no plans to issue AT1. The bank assured investors that its capital position was good and its exposure to Credit Suisse was "negligible". DBS Bank has issued some AT1 securities in the past.

Mitsubishi UFJ Financial Group MUFG and Sumitomo Mitsui Financial Group SMFG are two of the three banks with the largest AT1 bond issuance and are expected to issue AT1 bonds in April. But people familiar with the matter saidThese banks may now have to adjust terms or suspend offerings, depending on the extent to which the Credit Suisse crisis has hit investor sentiment.

Bond traders saidThe channels for issuing new AT1 bonds in Hong Kong are now empty and are unlikely to reopen until the second half of this year.

Credit Suisse AT1 bonds with a face value of about 16 billion Swiss francs ($17.2 billion) will be completely written down after UBS announced that it would buy Credit Suisse for 3 billion Swiss francs ($17.2 billion) ahead of the opening of Asian markets on Monday. Most analysts believe that the Swiss authorities' decision to zero Credit Suisse AT1 bonds should not be seen as a precedent for other jurisdictions, but it has caused significant turmoil in global markets.

In general, AT1 bondholders are repaid after depositors, general creditors and subordinated debt holders, convertible bondholders, Tier 2 capital bonds and other Tier 2 capital instrument holders, and take precedence over common shareholders. But in the Credit Suisse merger, holders of AT1 bonds were paid off in lower order than common shareholders.

But regulators in the eurozone, the UK and Hong Kong have stressed that they will not follow the example of the Swiss authorities to disrupt the order in which bank bondholders are repaid. Even so, the $260 billion AT1 market fell sharply this week. Analysts and investors are warning thatBuyers may demand a big increase in borrowing costs, which could create a "zombie market" in which prices are completely mispriced and distorted. Banks are no longer willing to issue new bonds to refinance old ones.

A Hong Kong wealth manager with a large presence in China said the global AT1 bond market was effectively "dead" in the short term: "any bank planning to issue new bonds must offer an unbelievably high premium to attract investors after that."

Greg Peters, co-chief investment officer of PGIM fixed income, said:

The impact of the Credit Suisse deal has changed the overall nature of the AT1 market, and I think its future issuance capacity may be close to zero.

Basically, in my opinion, this is going to be a zombie market.

Lotfi Karoui, chief credit strategist at Goldman Sachs Group, believes that there is no urgent need for refinancing in 2023. Issuers are expected to act rationally, wait for funding costs to fall, and then roll over their AT1 bonds. He added that about 60 per cent of current European AT1 bond inventories would reach the date of first redemption by the end of 2026.

Edit / lambor