THE riskiest bonds of European lenders are plunging after holders of Credit Suisse’s contingent convertible (CoCo) securities suffered a historic loss as part of its takeover by UBS.
Perpetual notes issued by Deutsche Bank, Unicaja Banco, Raiffeisen Bank International and BNP Paribas all dropped by more than 10 points on Monday (Mar 20). Deutsche Bank’s £650 million (S$1.1 billion) 7.125 per cent note dropped more than 14 pence to about 66, its biggest-ever one-day drop. Most other European lenders’ AT1s (Additional Tier-1) fell to record lows.
It follows the wipeout of 16.3 billion Swiss francs (S$23.6 billion) of Credit Suisse’s co-called CoCo bonds after UBS agreed to buy the bank in a historic, government-brokered deal aimed at containing a crisis of confidence that had started to spread across global financial markets.
It’s the biggest loss yet for Europe’s US$275 billion AT1 market, which was created after the financial crisis to ensure losses would be borne by investors, not taxpayers.
Risky bank bonds also tumbled in Asia on Monday, with some posting record declines. The retreat was most pronounced in bonds designed to be among the first to face writedowns if an institution gets into trouble. Bank of East Asia’s 5.825 per cent perpetual dollar note slumped 9.4 cents on the dollar to about 80 cents, data compiled by Bloomberg showed.
HSBC’s US$2 billion AT1 bond fell as much as 10 cents to around 85 cents on the dollar Monday, according to credit traders. That drop would be its biggest daily drop since it began trading earlier this month.
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“It doesn’t necessarily mute contagion risk,” Shane Oliver, AMP’s head of investment strategy and chief economist, told Bloomberg Television. “Funding costs for banks, whether it’s capital or debt, in Europe will go up.”
“A lot of investors will want to reduce their exposure to the banking sector and if they can’t sell the weaker names, the next step will be to sell the next weakest that still has liquidity,” said Pauline Chrystal, a portfolio manager at Kapstream Capital in Sydney. “Riskier securities will tend to sell off more, either lower rated issuers or down the capital stack.” BLOOMBERG
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