Indian AT1 bond issuers may not be affected by Credit Suisse crisis: Experts

A Credit Suisse Group branch in Zurich, Switzerland (Image: Bloomberg)

The fundraising capabilities of Indian banks through additional tier-I (AT1) bonds will not be impacted and they may raise capital smoothly despite the crisis at Credit Suisse bank, experts said.

The storied Swiss bank with more than a 160-year legacy, was felled by a series of scandals and missteps leading to the emergency merger with national rival UBS brokered by the Swiss government that in effect made the equivalent of about $17 billion AT1 bonds worthless.

AT1 bonds constitute a type of perpetual debt instrument that banks use to augment their core equity base and thus comply with Basel III norms in India.

Basel III refers to the international agreement arrived at in the wake of the financial crisis of 2007-09 that was drafted by the Bank for International Settlements, the global grouping of central banks.

However, against this backdrop, some experts said investor sentiment will remain negative in India in the near term till the dust settles.

“It will not affect the capital-raising capabilities of Indian issuers, given that the Indian banking system is actually in a better place right now vis-a-vis its global peers, given the whole balance sheet clean up that has been happening over the past few years,” said Vivek Iyer, partner and leader, financial services risk, Grant Thornton Bharat.

Experts view

Ajay Manglunia, managing director, JM Financial, said the development is unlikely to impact Indian banks as such since they already have rerated valuation as applicable in case of AT1 bonds and most institutional investors have anyway distanced themselves from these securities.

Manglunia added that if we look at spread on these AT1 as applicable here in our market that’s itself narrates a lot like people take it as a safer alternative for better carry. Spread itself is not as high as prevailing in western part of the word.

Dealers said that spread between Indian normal bonds and AT1 bonds are just 80-150 basis points (bps), whereas in developed economies, it is much higher, more than 250 bps in some cases.

“Considering the tighter valuation norms and as Indian banks are well capitalised, we can also expect that in the long run there will not be any issue or problems in AT1 bonds. From the issuer perspective, too, in short term challenges will prevail,” said Kranthi Bathini, equity strategist, WealthMills Securities.

Also read: Credit Suisse bosses spent a weekend in the Alps shortly before crisis: 'Glorious weather'

Concerns of AT1 bonds

Concerns around AT1 bonds were reignited in India after FINMA, Switzerland’s financial regulator, said in statement that about 16 billion Swiss francs ($17.24 billion) of Credit Suisse’s AT1 bonds will be written down to zero.

“The extraordinary government support will trigger a complete write-down of the nominal value of all AT1 shares of Credit Suisse in the amount of around CHF 16 billion, and thus an increase in core capital,” FINMA said in a statement.

UBS has agreed to buy Credit Suisse in full in a government-brokered deal to contain the confidence crisis in the latter.

“The Swiss Financial Market Supervisory Authority FINMA has approved the takeover of Credit Suisse by UBS,” FINMA said in a release.

These bonds are called contingent convertible bonds, or CoCos, and are often described as high-yield investments with a hand grenade attached.

The status of these bonds can change if a bank’s capital levels fall below a specified level. They can either be converted to equity, or if the shortfall of capital is big, it might be written down in parts or full.

Also read: Credit Suisse and its many scandals that led to the emergency takeover by UBS

Valuation norms by SEBI

After the Reserve Bank of India (RBI) write-off of YES Bank AT1 bonds, the Securities and Exchange Board of India (SEBI) put in norms for mutual funds to value these perpetual bonds as a 100-year instruments.

In 2021, the market regulator eased these norms and said the maturity of these bonds would be 10 years until March 31, 2022, and would be increased to 20 and 30 years over the subsequent six-month period. It added that from April 2023 onwards, the residual maturity of AT1 bonds will become 100 years from the date of issuance of the bond.

In the YES Bank case, the Bombay High Court had on January 20 quashed the lender’s March 2020 decision to write off Rs 8,415 crore of AT1 bonds, but had given it six weeks to appeal against the order. The order remained stayed as the bank decided to approach the apex court.

The Supreme Court, in the hearing today (March 3), decided to extend the stay for an additional period.