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

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.