Asia regulators calm nerves on AT1 bonds as banks reassess new issuance

Asia regulators calm nerves on AT1 bonds as banks reassess new issuance

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SYDNEY/TOKYO — Asian policymakers are scrambling to calm investor nerves about Additional Tier-1 (AT1) bonds after holdings of such Credit Suisse bonds were written down to zero, but the ongoing market turbulence is likely to keep a lid on fresh debt issuance.

As part of the multi-billion franc rescue of Credit Suisse by its rival UBS, Credit Suisse’s AT1 bonds with a notional value of 16 billion francs would be wiped out. Shareholders, however, who usually rank below bondholders in compensation terms, will receive $3.23 billion.

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The decision has angered global bond investors some of whom are working on possible legal action. The write-down to zero at Credit Suisse will produce the largest loss in the $275 billion AT1 market to date.

Hong Kong and Singapore central banks said late on Wednesday they would stick to the traditional hierarchy of creditors claims if a bank was to collapse in their respective jurisdictions.

Creditors, who receive less in a resolution compared to what they would have received had the financial firm been liquidated, would be able to claim the difference from a fund to be set up by the industry, the Monetary Authority of Singapore said.

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The comments from the Hong Kong Monetary Authority and the Monetary Authority of Singapore came after European regulators, including the European Central Bank, said earlier they would continue to impose losses on shareholders before bondholders.

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AT1s are a type of contingent convertible debt that are part of the capital buffers that regulators require banks to hold to protect themselves in times of market turmoil.

Despite the Asian central banks’ reassurances, bankers and analysts believe regional banks will not race to issue AT1 bonds in the near term, while financial markets remain volatile and investors turn cautious towards this debt instrument.

At least two Japanese banks, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group, were planning AT1 issuance as early as April, but both may now put the deals on hold amid the volatility, two sources told Reuters.

The sources did not want to be identified as the information is not public yet.

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“In line with our past bond issues, we will make appropriate decisions while closely monitoring market conditions,” Sumitomo Mitsui Financial Group said in a statement in response to Reuters queries. MUFG declined to comment.

The price of Asian banks’ existing AT1s in market trading has fallen by 4.1% this week, Natixis said in a research note on Thursday, with most selling focused on global banks listed in the region.

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There are $69 billion worth of outstanding dollar-denominated AT1 bonds from Asian Pacific banks, according to Goldman Sachs estimates, with mainland Chinese institutions accounting for 41% of total issuance.

Citigroup said on Wednesday that it expected the Credit Suisse fallout to trigger re-pricing of AT1 across Asian banks’ capital structures.

“Demand in the near term for AT1s will likely be affected,” Nigel Foo, head of Asian fixed income at First Sentier Investors, told the Reuters Global Markets Forum.

“But in the longer term, we see it as an opportunity for investors to get themselves better educated for such structures … these instruments were designed to absorb losses.” (Reporting by Scott Murdoch in Sydney, Makiko Yamazaki and Ritsuko Shimizu in Tokyo, Additional reporting Anisha Sircar in Bengaluru and Summer Zhen in Hong Kong; Editing by Sumeet Chatterjee and Jacqueline Wong)

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