Prices of AT1 bonds have come under pressure on Monday. The reason: with UBS‘s takeover of Credit Suisse, Additional Tier 1 bonds worth around 16 billion francs were declared worthless.
Invesco’s AT1 Capital Bond fund, which tracks the performance of AT1 bonds, lost more than 10%, while WisdomTree’s AT1 CoCo Bond ETF was down 9%.
“The risk of a chain reaction is present: the higher yield of this bond type is offset by a default risk that is not only theoretical – this could still lead to massive declines in the short term in this segment due to the high nervousness of investors and also underlines the counterparty (counterpart) risk of the financial sector,” warn the apano fund managers.
AT1 bonds are hybrid bonds issued by banks. The term “AT1” stands for “Additional Tier 1” and refers to the capital structure of banks. These bonds belong to a particular segment of hybrid bonds, also known as “CoCo bonds” (contingent convertible bonds).
AT1 bonds can be converted into equity if a bank runs into financial difficulties or another severe event threatens its solvency. The process is also known as “bail-in.”
However, the bonds can also be written off if the bank’s equity ratio falls below a certain level.
