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Brokenthoughts2 t1_jcx88cn wrote

Reply to comment by [deleted] in $CS right now … by ScoreIllustrious952

You’re very naive if you think it was the Swiss government. The big corporate CEOs wanted a big pay day at the expense of your moms and pops retirement funds for their own ineptitude.

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SeemoarAlpha t1_jcxhxm8 wrote

These CEO's of which you speak, may have shit on themselves if they want to end up at another bank. The problem is that by disrespecting the capitalization stack whereby bond holders had precedent over equity holder, a convention that had been a given for over 100 years, it will now make it harder for Banks to build a capital base by issuing bonds. This in turn will either make lending more expensive for borrowers or reduce the profitability for banks going forward. This was a terrible precedent.

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Brokenthoughts2 t1_jcxjk7d wrote

Although this is not entirely true as contingent convertible bonds have specific covenants which allow them to be completely written off at certain trigger activation scenarios. Senior corporate bonds in perpetuity or junior subordinated bonds with fixed maturity usually don’t have such covenants and consequently are still impervious to such precedence.

Legally FINMA would never take such an action if they didn’t have a strong argument for the inevitable lawsuit that is to be followed. ‘Yes Bank’ in India is one such example where they wrote off AT1 bonds in their entirety before shareholders and had a high court ruling against their favour so not all hope is lost. Although, Credit Suisse is quite clear on their bond prospectus so their future ruling could go anywhere. But in principle, I agree that bondholders even if they’re CoCos should be given precedence over shareholders and FINMA’s stance may have something to do with Credit Suisse’s own management incentive.

Disclaimer: I personally have invested into high-yield bond funds and this news is definitely devastating for these specific funds and ipso facto my own portfolio.

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SeemoarAlpha t1_jcya8b0 wrote

I just read Goldman's note that added more color regarding these so-called "CoCos", and you are correct, they were not the usual type bonds and could be gutted in this circumstance. My conclusion was also correct in that it will now be harder for banks to build their capital base using these types of bonds. Given this event, as Goldman puts it, "will likely lead to a reduced appetite for AT1 bonds and credit spreads will balloon". Or as another analyst put it, "AT1 bonds will now be put in the "bank junk" category and will have to compete with the rest of the high yield corporate market".

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Brokenthoughts2 t1_jcybpf6 wrote

Correct that’s why I said it’s not “entirely” true! But it will affect the liquidity of banks hence why ECB offered to swap dollars daily as a preemptive measure.

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SeemoarAlpha t1_jcyhh02 wrote

I'd have to understand the covenants better but at first blush, it would seem these CoCos are time bombs that could very well make a bad situation worse. If holders now know they can get gutted and not just take a haircut, their first impulse would be to convert to common (dilutive) then dump their shares, thus contributing to a downward equity spiral which might spook depositors and a bank run picks up steam. Sure, the CoCos give taxpayers some bailout protection, but as you say, central banks now have to jump into the breach to help with liquidity. So unless I'm missing something, a rethink of these CoCos as contributors to Tier 1 capital should be in order.

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Brokenthoughts2 t1_jcyl5s9 wrote

Yes should be a good read, fixed income is an interesting space. No in contingent convertible bonds the bonds are only converted to equity in certain triggering events as I mentioned earlier, you as a bond holder do not have any conversion rights. It absolutely has a place in tier 1 capital but their risk return profile needs to be reevaluated considering the Swiss madness and CS management’s greed.

Additionally, they can be callable and in practice most cocos are called back after 5/10 years during periods of low interest rates.

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Radiologer t1_jd1ohyy wrote

Didnt the guy who worked at lehman end up cfo at svb?

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