Japan’s Sumitomo Mitsui Financial Group sold an additional ¥140 billion ($1 billion) of grade 1 bonds on Wednesday, marking the first issuance of debt by a major bank since turmoil caused by the write-off of $17 billion of Credit Suisse bonds cast doubt on the market’s future.
The global bank has delayed new offerings of so-called AT1 bonds after Swiss regulators surprised investors by dropping the value of Credit Suisse AT1 debt to zero as part of the lender’s takeover by rival UBS in March.
Since then, investor sentiment has gradually improved, after regulators in other jurisdictions clarified that Switzerland’s decision to leave AT1 holders with nothing would not set a precedent for the $260 billion market.
Also known as contingent conversions, bonds are a risky type of bank debt that can be converted to equity or lowered to zero if the lender’s capital falls below a certain level. They were introduced by regulators after the 2008-09 global financial crisis to ensure that bondholders would bear some of the losses in the event of a bank failure and protect depositors and avoid taxpayer-funded bailouts.
Investor appetite for AT1 debt has recovered to levels before UBS’ takeover of Credit Suisse in March, when Swiss regulator Finma angered investors by deciding to return $3.3 billion to Credit Suisse shareholders and leave bondholders with nothing.
The iBoxx index of AT1 debt has recovered to levels before the Credit Suisse-induced price crash as investors were assured by regulators elsewhere that Switzerland’s markdown would not set a wider precedent.
The Bank of England and the European Central Bank were quick to issue statements after the Credit Suisse deal confirming that shareholders would be wiped out before bondholders in bank failures, sticking to the typical order of priority and assuring investors that Finma’s decision would not set a wider precedent.
According to Finma, debt relief was allowed because the AT1s in question contained explicit contractual language that they would be “written out entirely in a ‘survival event’ especially if extraordinary government support was provided”.
At a press conference this month, Masahiko Kato, the chief executive of Mizuho Bank who has taken over as the new head of the Japan Bankers Association, emphasized that AT1s issued by Japanese lenders generally do not have the same clause, describing the write-off of Credit Suisse. bonds as a “special case”.
The sale by Sumitomo Mitsui, one of the three banks responsible for the lion’s share of Japan’s AT1 issuance, is the latest sign of a thaw in market conditions. The lender, which had voiced investor appetite when the crisis at Credit Suisse erupted, said it decided to proceed with issuance after confirming a certain level of investor demand.
The bank said in its regulatory filing that ¥89 billion of the AT1 bond, which is non-callable for five years and two months, would carry a coupon rate of 1.879 percent, while ¥51 billion of the non-callable 10-year, two-month bond. debt will yield 2.180 percent.
Both tranches are priced at a spread of 1.7 percentage points. SMFG previously sold ¥107 billion worth of AT1 bonds in December in two tranches with a spread of between 1.4 and 1.5 percentage points.
Mitsubishi UFJ Financial Group, however, is delaying the sale of its new AT1 bonds, planned for this month, until mid-May at the earliest.
Japanese financial institutions’ exposure to Credit Suisse’s bond crushing was limited, but the biggest hit was Mitsubishi UFJ Morgan Stanley Securities, the group’s core securities unit, which sold about ¥95 billion AT1 of the Swiss lender to domestic retail and corporate clients. .
After last month’s AT1 turmoil, some banks chose not to refinance at higher fees — German specialist lenders Aareal Bank and Deutsche Pfandbriefbank decided not to cancel their bonds, with the latter citing “market conditions and economic costs”.
Despite the broad recovery in AT1, some warned of a two-tier market where Swiss debt continues to be viewed as very risky given the regulator’s impromptu decision.
JPMorgan analysts note that investors should consider the “Swiss ‘legal risk premium’, not the AT1 risk premium”, adding that the “damage should be relatively manageable” on the Swiss AT1 market given Finma’s choice to “damage bondholder interests and waive contractual terms with statutory ad hoc”.
Bonds issued in Swiss francs have not recovered as much as the broader market. The Swiss-franc-denominated AT1 bond issued by UBS has recovered 3.6 percent since its lows following the Credit Suisse turmoil. One of the dollar-denominated AT1 bonds has recovered 13 percent. The gap highlights how investors view Swiss debt.
