Credit Suisse AT1 bonds, 2023

At a glance

What happened

After years of losses and scandals, including about $5.5bn on Archegos, Credit Suisse lost the confidence of clients and markets as US regional banks failed in March 2023. Over the weekend of 18 and 19 March the Swiss authorities arranged its takeover by UBS, backed by government guarantees and central bank liquidity. The regulator, FINMA, ordered CHF 16bn of Credit Suisse's AT1 bonds written down to zero, while shareholders received UBS shares worth about CHF 0.76 each.

Why it went wrong

Most investors treated AT1 bonds as ranking above shareholders, because that is the order in a bankruptcy or a standard resolution. But this was a government-supported takeover, and Credit Suisse's AT1 terms included a viability-event trigger: the bonds could be written off if the bank received extraordinary public support, whatever its capital ratio. Swiss AT1 in this form was written down rather than converted into shares, so holders received nothing.

What it teaches

Read the trigger language, not the asset class label. A bond's ranking depends on its own terms and governing law as well as the general creditor hierarchy, and jurisdictions differ: EU and UK authorities said the next day that in their systems shareholders absorb losses first. The trigger that matters may be a regulator's judgment of viability rather than a published ratio.

Key terms

Additional tier 1

Perpetual bank capital with cancellable coupons, designed to absorb losses before senior creditors.

Contingent convertible

A bond that converts into equity or is written down when a specified trigger is hit.

Viability event

A trigger based on a regulator’s judgment that a bank cannot survive without extraordinary support.

Write-down

Reducing a bond’s principal, in part or in full, without giving holders anything in exchange.

CET1 ratio

Common equity tier 1 capital as a share of risk-weighted assets, the core measure of bank solvency.

Creditor hierarchy

The order in which claims on a failed firm absorb losses, normally equity first.

Where it sits in the course

Case studies like this one are used throughout risk management teaching, including FRM® preparation, as worked examples of contingent capital and contract (trigger) risk. In OTC Learn the lesson runs in five steps: what happened, the position, why it broke, what it cost and what it teaches, followed by a worked example with the numbers. See the lesson outline.

Related case studies

• Archegos, 2021Five banks, one position, and none of them could see it

The instruments behind it

OTC Learn lessons on the products this case turns on:

• Credit-Linked NoteA bond whose repayment depends on a credit event
• Credit Default SwapInsurance against a borrower defaulting