UBS acquired Credit Suisse for 3 billion francs (paying 76 centimes per share (CHF 0.76)) in a deal overseen by Swiss government regulators and with the cooperation of JP Morgan and Morgan Stanley. Moreover, the government has assured that it will make the necessary resources available to maintain operational capacity for both banks and the Swiss banking sector as a whole. However, investors' attention is focused on something else.
As part of the agreement, existing CS shareholders will receive 1 UBS share in exchange for 22.48 Credit Suisse shares. This is a big loss for shareholders, but worse for AT1 bondholders, a type of bond developed in the wake of the 2008 global financial crisis. As part of the deal, a decision was made to writedown more than $17 billion worth of AT1 bonds, which did not please investors and caused panic in the banking sector. AT1 bonds are a form of debt that counts towards banks' regulatory capital, helps to meet the capital requirements required by the Act and is eventually converted into shares should a bank fail to maintain the above requirements.
According to the capital structure, bondholders stand above shareholders in the face of possible problems of the company in question. In this case, things turned out differently. The disruption of the existing order has shaken the market and intensified the panic in the banking sector. Source: Credit Suisse
The decision to wiped out AT1 bonds triggered panic in the Asian debt market, a similar scale of sell-off is now moving to Europe. Source: Bloomberg
European banks stocks are plummeting at the beginning of the trading session. Source: xStation 5
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