UniCredit: here’s what it decided to do with AT1 bonds after the Credit Suisse shock
UniCredit ready to repay its AT1 bonds, already at the beginning of June, with a move ready to demonstrate the solidity of its capital. This was announced to the Reuters news agency by a source close to the bank headed by the CEO Andrea Orcel, in the midst of a crisis of confidence which, at least until last Friday, translated into a real attack against the banks: it was not only those who were taken by storm the shares of institutions but also their bonds, especially their subordinated debts, after the Credit Suisse shock.
Il drama Credit Suisse he made headlines not only for the decision of the Swiss authorities to get the Swiss bank – which has been struggling for years with various problems arising from its bets in gambling finance and various scandals – into a wedding with its rival UBS.
In addition to the controversy triggered by what several strategists have called a bailout – with the Swiss National Bank and the Swiss government wedding directors who covered UBS with billions of francs in guarantees – the Credit Suisse bailout caused a scandal, as resulted in the zeroing of 16 billion francs of AT1 bonds issued by the bank. A decision taken by Switzerland that went against European practice, locking up shareholders, to the detriment of bondholders.
In Europe, the rules establish the opposite or that, if the zeroing is inevitable, to pay the stockholders must come first, or the shareholders.
Credit Suisse shock on At1 bonds: the case of ‘zeroed’ bondholders
The shocking announcement came from the Swiss financial authority FINMA it froze the entire AT1 bond market.
After the news of those Credit Suisse bondholders who, overnight, found themselves in the portfolio bond with a value of zero, fears that other At1 bondholders would also end up “zeroed out” swept the market.
Anxiety then exploded when, on Thursday, in addition to the leap in CDS relating to Deutsche Bank bondssome rumors have signaled the decision of two German banks to ignore what is considered an existing tradition in the bond market, i.e. il buyback dei bond AT1 (Additional Tear 1).
To be precise, la tedesca Deutsche Pfandbriefbank AG it officially became the first European bank to decide not to exercise the call option with which it would have repurchased its bonds.
It is true that, if it had had to repay those bonds, the Teutonic bank would have had to issue them new higher yielding securities. The institute has therefore chosen the most convenient route.
It is a pity however that, in this period of strong turbulence on the markets, the announcement was interpreted as a difficulty on the part of the bank to repay its loans.
Deutsche Bank anxiety coupled with bond fears of two other German banks
The ad said so the coup de grace to markets already heavily stressed from the obsession with a new Lehman Brothers event and from the banking crisis that began with the crash of 10 March last Silicon Valley Bank (SVB) the largest US bank to shut down since the 2008 Washington Mutual bankruptcy, which brought back into the minds of market participants the trauma of the 2008 global financial crisis.
If the problems had stopped there, that would have been one thing.
But the bankruptcy of SVB, combined with the closure by the federal authorities of the crypto bank as well Signature Bank, a few days later the liquidation of Silvergate has sent worldwide stocks to the bottom.
Il in the case of Credit Suisse and in particular of the zeroed bonds it then further exhausted the markets by selling.
Thus we arrived at last Thursday and Friday, with fears for the fate of Deutsche Bank and the surprise announcements of these others two German banks: one was precisely Deutsche Pfandbriefbank, a bank active in the real estate market, which renounced the option to repurchase the AT1 bonds in April; the other was the German regional bank Aareal Bank AG which also communicated its intention not to recall its obligations, while specifying that the decision is not definitive.
UniCredit: At1 bond recall confirms capital solidity
The UniCredit move reported exclusively by Reuters, therefore, it is not surprising. The Italian bank led by CEO Orcel wants to confirm the soundness of its fundamentals.
UniCredit allegedly contacted the supervisory supervisors of the ECB, informing them of the plan aimed at repaying in advance perpetual bonds for a value of 1.25 billion euros, next 3 June, which corresponds to the first date available to enforce the recall of these At1 bonds.
I bonded AT1 to UniCredit pay a fixed rate coupon for the first 6 years equal to 6.625% on a half-yearly basis.
The Reuters agency specified that UniCredit has until the beginning of May to make a final decision.
Another source close to European bank supervision commented on UniCredit’s move, explaining how the repayment of At1 bonds is a good move that lenders can take to demonstrate the solidity of its capital level, which – the source specified – is such in the case of Piazza Gae Aulenti.
And it is certainly a positive move, if one considers that the news of Credit Suisse’s zeroed At1 bonds has triggered panic in the recent sessions on the market for these perpetual bonds, which in Europe have a value of around 275 billion dollars.
European legislation requires that banks that have intention to exercise the option to call their At1 bonds submit a request to the supervisory authorities at least three months before the date on which they can resort to exercising the call.
In the case of UniCredit, the first useful window to exercise the call corresponds to next June 3rd.
In any case, the tension on the At1 bond market remains palpable, so much so that, from Bloomberg data, it emerges that the yields of At1 bonds issued by banks they are up by three percentage points compared to the period preceding the crisis that engulfed the banking world, just over two weeks ago.
Bankitalia explains what AT1 bonds are
AT1 bonds they are described as follows on the Bank of Italy website:
Identified as “additional tier 1 subordinated bonds (AT1, also known as contingent convertibles, CoCos)”, the bonds are defined as follows:
“Subordinated debt securities eligible for inclusion in additional tier 1 capital, as defined in regulation EU/2013/575, amended by regulation EU/2019/876. I am hybrid financial instruments which, when certain conditions occur (trigger events) allow losses to be absorbed in a situation of normal bank operations by converting into capital, reducing all or part of the nominal value (write-down) or canceling one or more coupons ”.