AT1 Bonds, or Additional Tier 1 bonds, are unsecured bonds with no maturity date used by banks to increase their equity base and comply with Base III norms
These bonds were introduced during the global financial crisis by the Basel accord
AT1 Bonds are mainly used to raise long-term capital. They offer high returns but at a higher risk
Unlike other bonds, these do not have a maturity date, which means that the issuers do not have to pay the principal amount
The primary holder of these bonds is mutual funds
Owners of Credit Suisse’s $17 billion worth of “additional tier one” (AT1) bonds are in turmoil as the Swiss authorities said those bondholders would receive absolutely nothing
WHAT'S THE CONTROVERSY?
The move is at odds with the usual hierarchy of losses when a bank fails, with shareholders typically the last in line for any kind of payout
The legal basis for the Credit Suisse losses may be contested
WHAT NOW FOR INVESTORS?
For the coming few years, the AT1 market is going to go into some kind of a hibernation with a spill over effect on a wider bond market