Cut-Price AT1s From Credit Suisse Offer Hedge Funds Opportunities

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Debt investors and large hedge funds increasingly take advantage of the unique opportunity to buy Credit Suisse’s additional tier-1 (AT1) bonds at significant discounts.

This comes after UBS, Credit Suisse’s cross-town rival, took over the Swiss bank in a high-profile rescue earlier this year.

UBS’s takeover and Credit Suisse’s restructuring

UBS’s takeover involved a restructuring of Credit Suisse’s balance sheet, which involved writing down the AT1s issued by the Swiss bank. As a result, hedge funds and debt investors could purchase these bonds at prices lower than their face value.

The Swiss regulator determined that it wiped out Credit Suisse’s AT1 bonds worth $17.35 billion under the UBS deal. This decision was taken after assessing the bank’s financial situation and capital requirements.

The winding down of these AT1s has created a unique investment opportunity for hedge funds and debt investors, who can now purchase high-yield instruments at a fraction of their original cost.

Investment Opportunity in AT1 Bonds

AT1 bonds are a debt instrument that can convert to equity should make the issuing bank run into financial difficulty. This means that AT1s are higher in a bank’s capital structure than shares, and thus bondholders will be prioritized ahead of shareholders when it comes to getting their money back.

The winding down of AT1s also provides an attractive investment opportunity for those looking for high-yield instruments with a low-risk profile.

Shannon Kirwin, associate director at Morningstar, said, “Regulators have an interest in ensuring that the AT1 market continues to function, as these instruments are used by banks to maintain healthy capitalization levels.”

Hedge funds have taken advantage of this opportunity in recent months and have accumulated these cut-price AT1s, which offer attractive yields combined with potential upside from any capital appreciation potential.

The appetite for these bonds is likely to remain strong as debt investors continue searching for yield opportunities in the current low-rate environment.

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