Riskiest Bonds for Some Asian Banks Fall by Record on Credit Suisse Deal

(Bloomberg) — Some Asian banks’ additional tier 1 bonds fell by a record Monday morning, after a Swiss regulator said $17 billion of such AT1s from Credit Suisse Group AG will be wiped out.

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Bank of East Asia Ltd.’s 5.825% perpetual dollar note slumped 8.6 cents to 79.7 cents, which would be a record decline if maintained through the end of Monday’s trading, according to data compiled by Bloomberg. Kasikornbank Pcl’s 4% perpetual note dropped 4.3 cents to 79.8 cents, also on pace for its largest-ever decline.

DBS Group Holdings Ltd.’s 3.3% perpetual note slumped 2.5 cents to 90.4 cents, set for biggest decrease in 3 years. On average, all Asian banks’ AT1 dollar securities fell at least 1 cent, according to credit traders.

Additional Tier 1 notes were created after the Global Financial Crisis to ensure that losses in times of crises would be borne by investors, rather than taxpayers bailing out borrowers. The dramatic moves in global bank bonds amid the Credit Suisse and broader banking crisis comes just months after unprecedented drops in notes from some financial institutions in Asia, after an obscure South Korean insurer’s decision last year to buck market convention by skipping a call option before it reversed the decision.

“A lot of investors will want to reduce their exposure to the banking sector and if they can’t sell the weaker names, the next step will be to sell the next weakest that still has liquidity,” said Pauline Chrystal, a portfolio manager at Kapstream Capital in Sydney. “Riskier securities will tend to sell off more, so either lower rated issuers or down the capital stack.”

Holders of Credit Suisse bonds suffered a historic loss when a takeover will trigger a “complete write-down” of the bank’s additional tier 1 bonds worth about 16 billion Swiss francs ($17.3 billion), Swiss financial regulator FINMA said in a statement.

–With assistance from Finbarr Flynn.