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Risky debt issued by several European banks in response to the 2008 global financial crisis was under sharp pressure in New York trading on Monday after regulators orchestrated a sale of Credit Suisse to UBS, triggering a historic write-down of specialty bonds in the process.
Debt issued by Barclays
BARC,
Deutsche Bank
DB,
and HSBC Holdings
HSBC,
known as “contingent convertible” bonds, CoCos, or additional Tier 1 (AT1) bonds, was among the hardest hit in New York trade out of the broader U.S. investment-grade corporate bond market, according to MarketAxess.
Regulators over the weekend surprised investors by writing down the value of Credit Suisse’s U.S.-dollar denominated CoCo debt to zero, as part of its sale to UBS
UBS,
for $3.25 billion. The move has triggered turmoil in the specialty $275 billion market for European convertible bank bonds.
See: What are CoCos and why are Credit Suisse’s now worth zero?
Barclay’s 8% coupon CoCos issued March 2019 were pegged at a yield of 21.4% and price of 86 cents on the dollar on Monday, or up from a one-year low of about a 4.4% yield and roughly 107.6 price.
Deutsche Bank’s 7.5% coupon CoCos were near a 23% yield, off a one-year low of 6.5%, while HSBC’s 4% CoCos were pegged near a 15.9% yield, up from a one-year low of 5.5%, according to MarketAxess.
Bond yields and price move in the opposite direction, with higher yields signaling investors want more compensation to shoulder the risks of owning certain bonds. Investors remain on edge about potential additional fallout in the banking system after several midsize U.S. banks failed, and after a big liquidity injection for Credit Suisse from the Swiss central bank last week failed to calm nerves.
Bank CoCo bonds were designed in the past decade to absorb losses in times of stress, by converting to equity. As MarketWatch’s Ciara Linnane wrote, “If a bank is functioning normally, investors are paid a coupon, just like any bondholder. But if things go wrong, the bank can ‘bail in’ the CoCo investor, converting debt into shares in what would then be a troubled lender.”
Goldman Sachs credit analysts pegged the toll of Credit Suisse’s
CS,
CoCo’s as “the largest loss ever inflicted to AT1 investors since the birth of the asset class post-global financial crisis,” in a Sunday client note.
“Whether investors treat this decision as a one-off or whether they rethink the asymmetry of their risk-reward at times of elevated financial distress remains to be seen.”
Law firm Quinn Emanuel Urquhart & Sullivan on Monday said it was in talks with holders of Credit Suisse’s CoCo bonds, about options for pursuing a lawsuit or other legal recourse.
U.S. stocks were higher Monday after the takeover deal of Credit Suisse by UBS, with the Dow Jones Industrial Average
DJIA,
up about 0.9%, the S&P 500 index
SPX,
0.6% higher and the Nasdaq Composite
COMP,
up 0.1%, at last check, according to FactSet.
Related: Anger and tears from shocked Credit Suisse staff after historic UBS takeover
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