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CoCo bonds fall sharply over Credit Suisse deal
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IANS | 20 Mar, 2023
Derivatives that track the value of riskier bank debt � the sort that is
being wiped out in the Credit Suisse takeover � are falling sharply
now, according to a media report.
Invesco's AT1 Capital
Bond exchange-traded fund, which tracks the value of AT1 debt issued by
banks, is down 15 per cent, The Guardian reported.
These AT1
bonds, known as "contingent convertible" debt or CoCos, are designed to
be triggered at times of market turbulence. They are basically shock
absorbers to activate in a crisis � if a bank's capital levels fall
below a certain point in a crisis, AT1s are converted into equity, or
written off.
Investors are startled that Credit Suisse's AT1
bonds are being written off, even though the bank's equity is not
totally destroyed (shareholders are taking a 60 per cent haircut).
Typically, AT1 bonds is meant to be above equity in the debt heirachy,
The Guardian reported.
Neil Wilson, chief markets analyst at
Markets.com, said this �blatant' upending of the debt heirachy will have
ramifications, The Guardian reported.
"These are �contingent
convertible' bonds that are riskier than other debt instruments and
designed to get wiped out in a crisis � or converted to equity.
"However,
shareholders in CS are getting something, even if it's not much.
Blatantly upending the hierarchy of debt will have ramifications and I
think this is why we are seeing such a negative reaction in bank shares
this morning," Wilson said.
Charles-Henry Monchau, chief
investment officer at Syz Bank, fears there will be �spillover' damage
to global credit markets, The Guardian reported.
Monchau said,
"According to the Swiss bail-in regime, AT1 debt is above equity in the
loss absorption waterfall. This is an arresting development, given that
even unsecured bondholders usually rank above equity holders in the
capital structure. So for equity holders to get 'something' and CoCo
bond holders to get 'nothing' raises serious questions about the real
value of CoCo bonds."
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
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66.20
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64.50 |
UK Pound
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87.50
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84.65 |
Euro
|
78.25
|
75.65 |
Japanese
Yen |
58.85 |
56.85 |
As on 13 Aug, 2022 |
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