How AT1 wipeout could impact the global bond market
2 min read 27 Mar 2023, 11:22 AM ISTThe impact of a wipe-out of AT1 bonds on the global bond market would depend on the size and significance of the affected bank
PremiumAT1 bonds, also known as Additional Tier 1 bonds, are a type of debt instrument that banks issue to meet their capital requirements under Basel III regulations. These bonds have no maturity date and are perpetual. They can be called or redeemed by the issuer at their discretion. However, they are considered to be high-risk instruments because they absorb losses in the event of a bank's financial distress, and can even be written off or converted into equity if certain trigger events occur. This makes them riskier than other types of debt instruments, such as senior bonds or deposits, which are usually protected from write-downs.
If a bank writes off or "bails-in" its AT1 bonds, this can lead to significant losses for investors holding these securities. Such events can cause a loss of confidence in the bank's ability to repay its debts, which can trigger a sell-off in the bank's other debt instruments, such as senior bonds or deposits.
The impact of a wipe-out of AT1 bonds on the global bond market would depend on the size and significance of the affected bank. If the bank is large and systemically important, such as a global investment bank, the impact could be significant and widespread. In such cases, investors may become more cautious about investing in AT1 bonds, and banks may have to offer higher yields to compensate for the increased risk. This could lead to a repricing of risk across the bond market and higher borrowing costs for banks and other issuers.
Investors in Credit Suisse's riskiest bonds, known as additional tier 1 or AT1, are faced with a $17 billion wipeout, potentially pushing Europe’s $275 billion market for these bonds into turmoil, with a likely cascading impact across other geographies. The wipeout of AT1 bonds in Credit Suisse is not the first such crisis. In 2020, Yes Bank in India failed to repay its AT1 bondholders, resulting in losses of about $1.3 billion, which exposed the risk associated with such instruments to Investors.
Retail Investors should be especially aware of the risk associated with investing in AT1 bonds because they can result in considerable losses in the event of a bank's financial crisis, as demonstrated by the Credit Suisse and Yes Bank incidents, and they are not as safe as they were originally believed to be. Investors should seek professional advice, or undertake adequate due research before investing into such instruments."
Mr. Abhijit Roy is CEO & Co-founder, GoldenPi Technologies
