“Where’s my money?”- Credit Suisse AT1 bondholders.

One of the very first finance concepts we are told is that bondholders get the preference over shareholders in case of the liquidation of a company. What we were not told is that even this almost-ironclad rule has its exceptions- its share of anomalies. So is the case with Credit Suisse’s AT1 bondholders. With the banking fiasco that happened about four months back came a wave of uncertainty and deep unrest among investors. The times were unusual. Banks being sold for as low as 1 pound and bonds worth billions getting wiped out must be the highlights of the whole show.

The question that arises here is that how is this even possible? Here is an explanation-So, lets begin with the explanation of what AT1 bonds is. AT1 bonds or Additional Tier 1 bonds are contingent convertible bonds essentially meaning that they can be converted into equity or written off. They are the riskiest types of bonds and hence, carry a high coupon. They are considered a safe option if the institution were to fail by providing a safety cushion.

In case of Credit Suisse AT1 bonds, the interesting fact is that although the bondholders hold a higher rank compared to the shareholders, the Swiss bonds’ terms state that in case of a restructuring, the issuer is under no obligation to honor their AT1 bond commitments. Essentially speaking, out of all the investors, AT1 bondholders were the only ones who did not get any kind of compensation.

While the investors are still furious about the losses they have suffered, it must be noted that it is not the first time this has happened. The $1 Billion wipe out of India’s Yes Bank’s AT1 bondholders is still an active court case. What happens when cases like these rise in number is that it takes the investors all over the globe by a frenzy. Their faiths in the global capital markets drops and such is the case here. The global AT1 bond prices have dropped signaling a state of panic among investors. In a way to counter the dropping prices, the different banks across the globe have come together to condemn the actions Credit Suisse took. Analysts believe, citing the incident as a precedent that raising money in the bond markets is going to be tougher for banks as investors are going to be more cautious in the future.

It can be speculated that since the market might not respond well to being duped, in order to maintain the investors still interested, the coupon payments be bumped along with the assurance that no matter what, investors will get their money back. That being said, it is extremely important for investors to be aware of all the laws behind a security before they place a bet.