S&P/ASX 200 Index (ASX: XJO) investors beware.
The UBS bailout and takeover of Credit Suisse engineered by the Swiss government is an anomaly.
The deal, which favours the defunct bank's shareholders over its bondholders, has investors wondering if the law of the jungle now applies to their portfolios, rather than long-held market laws.
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ASX 200 investors would line up behind bondholders in case of bankruptcies
If an ASX 200 company were to go bankrupt, its shareholders would be last in line to reclaim any remaining assets.
A long-held market rule is that corporate bondholders, while potentially still losing some or all of their investment if a company they've lent money to goes insolvent, get first crack at those remaining assets.
But that's not what's happening with Credit Suisse.
As we reported yesterday, UBS will acquire Credit Suisse in an all-share transaction worth about CHF3 billion (AU$4.8 billion) in a deal backstopped by the Swiss government and Swiss central bank.
Credit Suisse stock investors will get one UBS share for every 22.48 Credit Suisse shares they own.
But the bank's Additional Tier 1 bondholders will get nothing, with some CHF16 billion worth of Credit Suisse bonds likely to become worthless.
Opposition to UBS acquisition of Credit Suisse rising
The Swiss government's solution to the Credit Suisse crisis, hammered out over the weekend, isn't sitting well with regulators and central bankers from other nations.
The Bank of England (BoE) sounded off on the issues, saying shareholders should bear any losses ahead of AT1 bondholders.
The Swiss solution is not meant to be the case.
And, as would likely be the situation with ASX 200 shares, it won't be the case if a similar scenario arises in the United Kingdom.
"Holders of such instruments should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy," the BoE said (courtesy of Reuters).
The European Central Bank (ECB) also waded into the controversy.
According to the ECB (quoted by The Australian Financial Review):
Common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down. This approach has been consistently applied in past cases and will continue to guide the actions [of the ECB] … in crisis interventions.
Among the concerns raised by analysts is that the Swiss government's unconventional solution could make it harder for banks (potentially including ASX 200 banks) to acquire funding at a time when the global financial sector is reeling.
According to investment director at abrdn Plc Luke Hickmore (quoted by Bloomberg):
The AT1 market will be shut now for new issuance for a while. We will all be parsing which securities in AT1 space have a similar trigger to CS's and which don't, which banks need to issue AT1s and which don't.
While UBS reported it expects the deal to be complete before the end of the year, that may be a premature assumption.
As the AFR reports, global law firm Quinn Emanuel Urquhart & Sullivan is speaking to Credit Suisse AT1 bondholders about potential legal options.
The law firm said it's "already in discussions with a number of holders of Credit Suisse's AT1 capital instruments … about possible legal actions that may be available to them".
Swiss MPs are also considering whether parliament might review parts of the controversial bailout.
