Credit Suisse's AT1 bonds angering bondholders

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Credit Suisse's AT1 bonds angering bondholders

LONDON Reuters -- Credit Suisse has written down its Additional Tier 1 bonds to zero as part of its takeover by UBS, angering bondholders who thought they would be better protected in a rescue deal announced on Sunday.

The bonds, which are a riskier type of debt than traditional bonds, have a notional value of 16 billion Swiss francs $17.24 billion, according to the Swiss regulator and Credit Suisse.

FINMA President Marlene Amstad, who was asked about the decision at the press conference after the UBS takeover announcement, said the regulator had chosen to stick to the too-big-to-fail framework and trigger the bonds.

AT 1 or CoCo are a form of junior debt that counts towards the banks' regulatory capital, which is a form of junior debt that has to be developed in the wake of the global financial crisis. They are designed to be converted into shares when the capital buffers are eroded beyond a certain threshold, so they are just above equity in the priority ladder for repayment in a bankruptcy process.

Some bondholders were angry at the move to write down bonds to zero, because it appeared that bondholders will fare worse than shareholders in the deal.

It's stunning and hard to understand how they can reverse the hierarchy between AT 1 holders and shareholders, said Jerome Legras, head of research at Axiom Alternative Investments, an investor in Credit Suisse's AT 1 debt.