After the bank runs in the USA, one of Switzerland's oldest banks crumbled, and its bondholders are in trouble.
Last week, we discussed the demise of two major US banks, and before we could catch our breath, another financial giant in Switzerland, Credit Suisse, went spiralling down.
In this week's edition of Three Point Five, we'll unravel the story of Credit Suisse's downfall, explore the global economy, and delve into AT1 bonds. Plus, something similar happened in India as well. Stick around till the end to get our insights.
But before that, here is a quick recap of the last 2 days that were significant for Indian mutual fund investors.
On Thursday night, there were proposed amendments to the Finance Bill 2023 that would impact mutual fund investors. By Friday morning, the Bill was passed and mutual fund investments will never be the same again.
Here's a quick summary of the changes -
We conducted a webinar with Aashish P Somaiyaa and Neil Borate where we analysed the amendments and how they impact investors.
Here's a link to the YouTube live in case you missed it -
Now back to our topic for this newsletter -
Credit Suisse has been facing a downward spiral thanks to a series of unfortunate events. The once-powerful lender's total assets, which were $1.2 trillion before the 2008 financial crisis, are now less than half that amount. Let's decode what went wrong.
The collapse of Silicon Valley Bank, followed by the Signature Bank blow-up, brought the problems Credit Suisse was facing into the limelight.
Its downfall began with a risky acquisition, followed by aggressive expansion plans, internal feuds, and scandals. The 166-year-old bank's reputation took a hit due to fraudulent bankers, spying on employees, and significant losses from Archegos Capital Management and Lex Greensill. Despite restructuring efforts, aggressive interest rate hikes and dampened investor confidence ultimately proved too much for Credit Suisse to handle.
The Swiss central bank encouraged UBS Group to take over Credit Suisse to save the sinking ship. In a historic merger of two illustrious Swiss banks, UBS agreed to pay over $3 billion to acquire rival Credit Suisse. The first merger of globally significant banks since the 2008 financial crisis is one of the most critical banking events in recent memory.
Is that good news? Partially yes, but bond investors faced the heat. Amidst what was known as the 'saviour of a financial crisis' level merger between Credit Suisse and UBS, the Swiss regulator FINMA has written off $17 million worth of investments in AT1 bonds.
First, let's understand what AT1 bonds are.
Additional Tier 1 (AT1) bonds, also known as "contingent convertible" or "CoCo" bonds, are a unique type of debt issued by banks to raise capital. These bonds act as a safety net if a bank faces financial stress, and investors holding these bonds may face losses.
With the downfall of Credit Suisse, AT1 bonds worth $17 billion became worthless overnight. And this left investors facing huge losses.
Remember the Yes Bank crisis that wiped out crores of investor assets a few years ago?
In 2020, Yes bank faced a severe liquidity crisis due to various factors, including aggressive lending practices, poor asset quality, corporate governance issues, concentration risk, and rapid expansion. The situation reached a critical point when the Reserve Bank of India (RBI) had to intervene and impose a moratorium on Yes Bank in March 2020, restricting withdrawals and initiating a restructuring plan to save the troubled lender.
As part of the restructuring plan, the RBI wrote down Yes Bank's AT1 bonds (Additional Tier 1 bonds) worth Rs 8,400 crore to absorb the losses and recapitalize the bank.
The write-down of Yes Bank's AT1 bonds was unprecedented in the Indian banking sector and resulted in a significant loss for bondholders, including retail and institutional investors.
While such situations create a sense of uncertainty, investing in fixed-income investments like bonds is necessary to maintain a balanced portfolio. This is why we at Dezerv have built a PQRS strategy to invest in bonds.