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Weighing bank AT1 perps: Are you compensated enough for the risk?

Not all bank perpetuals are alike. Investors should get familiar with the loss-absorption mechanism of AT1 debt

 Genevieve Cua
Published Mon, Mar 27, 2023 · 05:50 AM
    • The Swiss regulator has ordered the writedown of all of Credit Suisse's AT1 bonds, following the bank's takeover by UBS. Some bondholders are considering legal action.
    • The Swiss regulator has ordered the writedown of all of Credit Suisse's AT1 bonds, following the bank's takeover by UBS. Some bondholders are considering legal action. PHOTO: EPA-EFE

    A SWISS bank perpetual note was recently in our portfolio, and I was none the wiser on its inherent risks – until the unprecedented, total writedown of Credit Suisse’s entire 16 billion Swiss francs worth of perpetuals.

    Our investment in UBS’ 5 per cent US dollar perp was called in January, a happy outcome since our holding was short. The decision to invest wasn’t entirely by chance: Interest rates rose sharply last year, but when we invested in mid-2022, the note’s duration was short with less than a year to go before the expected call date. If the issue hadn’t been called, a step-up interest rate would compensate for a longer holding period.

    Would I invest in a bank perp again? Perhaps. But such notes’ outsized risks – relative to banks’ senior bonds – would now make me think twice or three times. I would certainly peruse the offer documents, which I hardly did with the UBS issue, our portfolio’s first bank perp investment.

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