Rules of the Game - from Swiss Finish to Finished
The events that unfolded over the weekend were sure to make for some volatile trading sessions in the Additional Tier 1 (AT1) market this week. As we wrote on Monday, after the decision from the Swiss regulator to rip up the rules and subordinate bondholders to shareholders it was inevitable that questions were going to be asked about the future of the asset class. However, the European Banking Authority (EBA) and Bank of England) (BoE) were quick to come out and reassure markets on the merit and hierarchy of AT1s and European Central Bank (ECB) President, Christine Lagarde, went one step further in her direct rejection of Switzerland’s approach stating that “Switzerland does not set standards in Europe”. And so, where has that led to in trading terms?
AT1s fell sharply on Monday morning by between 7-15 points with higher beta names and UBS underperforming. Nonetheless, the importance of the European and the UK’s regulatory rebuttal to the weekend’s proceedings became apparent as post their respective statements, a quick rebound took place and by the end of the session roughly half of the move down had been recovered. The positive momentum has continued through yesterday and this morning with some bank AT1 bonds now back to last Friday’s prices – i.e. recovering all of the post-Credit Suisse action, but still lower than pre the US regional bank led sell off.
To give a few examples, at time of writing BNP 7.375% and BARCLAYS 8.875% are two AT1 bonds to have recovered to Friday prices. Though it should be said that both bonds are still down over 10 points from their February highs and are yielding over 10% to call in sterling terms and around 10% even when priced to perpetuity. There are still names lagging, most notably UBS, and we would not be surprised to see this continue due to question marks over the Swiss regulatory regime. In addition, it appears that legal challenges could be launched from both bondholders and shareholders regarding the Credit Suisse takeover, which could also weigh on performance, although UBS equity has performed strongly. Finally, it is worth noting that even through this period, AT1s have remained one of the most liquid instruments that we follow.
The situation is still fluid and of course we are keeping a very close eye on both banking fundamentals and market moves going forward, however we have been very reassured by both the statements from the EBA and BoE and by the way the AT1 market has functioned, particularly in the wake of the regulatory rebuttal on Monday.