What are AT1 bonds and why has UBS started selling them?
UBS has begun selling its first additional tier 1 (AT1) bonds since it took over rival bank Credit Suisse and sent shockwaves through the risky debt market in March.
The new non-callable bonds are split between five years and ten years and offer a yield of about 10 per cent and 10.125 per cent respectively, according to the LSEG capital markets news service.
An AT1 bond is essentially a bond with insurance — with it being converted into equity if a bank falls below a certain, pre-decided strength or capital limit. They’re a creation of post-financial crisis reforms and help a bank to meet capital requirements.
AT1s are also known as Contingent Convertibles — hence the nickname CoCo — and were designed in part to make it less likely that the taxpayer would have to bail out a failing bank.
They are perpetual and non-redeemable, and as part of the contract, bondholders agree to the possibility of them being written down to zero in extraordinary circumstances.
Because of the high premium, banks issue the AT1s with a high yield, in part because they have confidence that they won’t need to turn them into equity — which would only happen in a scenario where the bank became significantly weaker — and because you wouldn’t be able to sell the bonds with all their associated risk without a chunky reward.
UBS told Morning Wire today: “We confirm that UBS Group AG is offering additional tier 1 securities. We will provide additional information when the offering is complete.”
Some $17bn of Credit Suisse’s AT1 bonds were wiped out by Swiss regulators during its rapid merger with UBS and holders subsequently mounted a legal action.
UBS’s chief executive, Sergio Ermotti, is set to announce a strategy for the merged banks in February but is battling high costs as he winds down Credit Suisse’s unprofitable businesses while integrating its key Swiss banking unit.
Opponents argue the integration could cost thousands of jobs in Switzerland and reduce competition. UBS has confirmed that it cut 4,000 jobs from July to September, bringing total layoffs to 13,000 this year as the bank seeks to avoid duplicating roles.