Credit Suisse Group AG s riskiest bonds pared their advance on Sunday on the back of fears that Swiss authorities may need to nationalize the bank if a deal with UBS Group AG falls through. If that happens, the bonds will likely be wiped out as part of the rescue plan.
According to people with knowledge of the matter, additional Tier 1 notes, the riskiest portion of the capital stack, Additional Tier 1 notes, were quoted at prices ranging from high 30 s to mid 50 cents on the dollar, a drop of about 20 cents from roughly an hour earlier in the day. They were still higher than their close on Friday, when prices ranged around the 20 s and 30 s.
It was a swift turnaround for the narrative, which had shifted positive on Sunday on the belief that the up to $1 billion bid by UBS would have avoided a scenario in which bondholders suffered punitive losses on some of Credit Suisse's riskiest bonds.
The securities introduced after the global financial crisis are designed to help banks meet regulations designed to prevent failure. If a bank's capital levels fall below a specified level, they can be written off. In the case of Credit Suisse, its common equity tier 1 would need to fall below 7% of its risk-weighted assets.
The Swiss authorities are considering taking over the bank in full or holding a significant equity stake if UBS' takeover falls through, although nothing has been agreed. On Sunday afternoon, Reuters reported that the Swiss authorities are looking at imposing losses on bondholders as part of a rescue plan.
Several banks, including Goldman, Morgan Stanley and Jefferies Financial Group, have kept their bond sales and trading desks open through the weekend for Credit Suisse bonds, a rare occurrence except in times of stress.