Minimal exposure to Credit Suisse AT1 debt for unit trusts, but far more for fund houses

FUND houses have turned out to be sizeable holders of Credit Suisse’s now-worthless Additional Tier-1 (AT1) bonds. But the exposure appears minimal at the individual fund level.

Based on Morningstar’s database of funds available for sale in Asia, the exposure to Credit Suisse’s AT1 debt is generally less than 1 per cent.

AT1 bonds – also known as contingent convertible bonds (CoCos) – are a debt instrument issued by banks to meet their regulatory capital requirements. CoCos are high-risk, high-yield perpetual securities that can be converted into equity under certain conditions.

When the Swiss Financial Market Supervisory Authority engineered a rescue takeover of Credit Suisse by UBS, the regulator also ordered a wipeout of Credit Suisse’s AT1 debt as part of the deal – leaving these CoCo bondholders with nothing.

Bloomberg reported that asset manager Pimco is the largest holder of Credit Suisse’s AT1 bonds, with around US$807 million of the securities, while investment manager Invesco holds around US$370 million of the bonds.

BlackRock had around US$113 million of the AT1 debt as at end-February, while asset manager BlueBay held around US$134 million of the notes at the end of November.

Morningstar is unable to generate data on funds’ overall exposure to CoCo debt.

Based on Morningstar data, the funds with the highest exposure were two Single Bond Series funds by AHAM Asset Management, which invested only in Credit Suisse AT1 bonds. They have been suspended from trading, and are excluded from the accompanying table.

Excluding the AHAM funds, the fund with the highest exposure, at 3.5 per cent, was a fund run by Pimco, while a fund by Franklin Templeton had a 2.1 per cent exposure.*

Most fund managers The Business Times (BT) reached out to declined to comment.

A spokesperson for Lion Global Investors said none of the company’s directly managed funds was invested into Credit Suisse’s AT1 bonds. Less than 0.1 per cent of its total assets under management are invested in AT1 bonds.

Meanwhile, multi-family offices polled by BT reported minimal exposure to CoCos in general.

Some 16 billion Swiss francs (S$23.1 billion) of Credit Suisse’s CoCo bonds will be written down to zero as part of the rescue takeover by UBS. Meanwhile, shareholders – which are typically the lowest in priority for repayment during bankruptcy – will receive US$3.23 billion as part of the UBS deal.

This angered bondholders as CoCos rank a tier higher than equity in the priority for repayment during bankruptcy, with some bondholders considering possible legal action, Reuters reported.

*Amendment note: A previous version of this story stated that EFG had two funds with exposure to Credit Suisse’s AT1 debt, based on Morningstar data. EFG has since clarified that its New Capital Wealthy Nations FMB fund does not and has never had any AT1 exposure. The 5.51 per cent exposure cited by Morningstar refers to Tier-2 debt, which is not impacted by the write-down.