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I see news that AT1 holders of Credit Suisse , a type of bonds that were a solution to 2008 crisis.

...They were created in the wake of the 2008 financial crisis as a way for failing banks to absorb losses, making a taxpayer-funded bailout less likely...

So main questions is how Equity holders are getting paid, but not the bond holders. Has the central banks thrown out the risk reward system completely?

My other questions are

  1. Does US Companies ( banking/ non- banking ) issue such bonds ?
  2. Are these AT1 bonds same as Junk Bonds ?
  3. How US investors are protected or can protect themselves from these ( other than just selling) ?

1 Answer 1

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It's important to understand that they aren't just regular bonds, they are CoCo (contingent convertible) bonds that exhibit features of both bonds and equity. They all have different contingencies and in the case of Credit Suisse, there were provisions to write them down to zero if the CET1 ratio dropped below 7% or if FINMA says so.

Further reading: Matt Levine's Money Stuff - UBS Got Credit Suisse for Almost Nothing

My questions are:

Does US Companies ( banking/ non- banking ) issue such bonds ?

For the most part no, they're mostly issued by European banks

Are these AT1 bonds same as [junk][3 bonds ?

Not necessarily. Although they pay a high coupon to compensate for the higher risk (most junior debt, in some events junior to common equity) but banks usually have investment grade credit ratings.

How US investors are protected or can protect themselves from these ( other than just selling) ?

Caveat emptor... Understand what you're buying or don't buy them in the first place.


Responding to your edit

So main questions is how Equity holders are getting paid, but not the bond holders. Has the central banks thrown out the risk reward system completely?

Again, no. Investor knew (or should have known) what they were getting themselves into. They didn't complain about the outsized coupon during the good times...

What is questionable is that Switzerland altered its laws to avoid a shareholder vote but that's a separate debate...

Extraordinarily, the deal will not need the approval of shareholders after the Swiss government agreed to change the law to remove any uncertainty about the deal.

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    thanks, it really sounds that by giving the name bonds the companies have cheated the public. I remember a MBA professor has told that these Bonds are based on laws that are o very long length in text (4-5 dictionary size rules) and for each bond issue same volume of law is used so no one reads with the assumption that newBondXYZ is following same rule of BondPQR that was issued 20/30 years ago.
    – puzzled
    Mar 21, 2023 at 2:48
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    Remember they were called "Perpetual Tier 1 Contingent Write-down Capital Notes". You can't eat Tide pods and then blame the manufacturer...
    – 0xFEE1DEAD
    Mar 21, 2023 at 2:53
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    @puzzled "each bond issue same volume of law is used so no one reads with the assumption that newBondXYZ is following same rule of BondPQR that was issued 20/30 years ago" - that's the lesson here. The AT1 bond were very specifically NOT a 'regular' bond. They were high-return bonds that had additional strings attached.
    – Chris B
    Mar 21, 2023 at 13:01

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