Investor of Credit Suisse bonds still believes in value of debt class

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Investor of Credit Suisse bonds still believes in value of debt class

In Zurich are logos of Swiss banks UBS and Credit Suisse.

NEW YORK - One of the biggest investors of the Credit Suisse bonds that were wiped out by the UBS takeover of the troubled Swiss bank still believes in the value of the debt class and the bail-in system designed to save banks seen as too big to fail.

Spectrum Asset Management Inc liquidated all its Credit Suisse positions during late market trading on Saturday before the contingent debt, known as CoCos among traders, was written down to zero in the UBS deal.

Bail-ins were included in the Dodd-Frank Act to protect U.S. taxpayers after the collapse of Lehman Brothers in 2008, so that they would not bear the cost of a bailout. Banks in difficulty will be bailed in by holders of CoCos, formerly known as Additional Tier 1 bonds AT 1 Anybody that bought CoCos who didn't think they had their head in the sand. When it happens, nobody likes it, but that's the whole idea behind CoCos, Philip Jacoby, chief investment officer at Spectrum, told Reuters.

It's painful and bleeds out to the whole system, and that's what happened. He said that the bail-in worked, and that the integrity of the financial system overrode everything else.

The firm's exposure to Credit Suisse AT 1 represented 1.32% of Spectrum's assets under management AUM on February 28. The AUM of Spectrum was $21.4 billion on December 31, when it was the fifth largest holder of debt, according to Refinitiv data.

The PIMCO Investment Management, which had an AUM of $1.74 trillion as of December 31, held $775 million of the debt at the time. PIMCO didn't want to say anything.

In the early 2021 and early 2022, Spectrum held about $400 million of Credit Suisse AT 1 bonds, Jacoby said. He said that Credit Suisse debt represents about 12% of the benchmark for CoCos, a huge slice of the ICE BofA U.S. dollar contingent capital index.

It's a big ship when you want to turn it. He said it takes time. We had been paring back in Credit Suisse and had an internal negative outlook for a little over a year. Jacoby said that the yields on AT 1 bonds are higher than at the height of the European sovereign debt crisis a decade ago, and spreads are about four standard deviations wider than their average over the past three credit cycles.

Spectrum, a member of the Principal Financial Group based in Stamford, Connecticut, has recently reduced by $10 million more than $53 million in CS bonds, yielding 9.75% of the bond it bought at issue, according to Refinitiv data.

Matthew Byer, the firm's chief operating officer, said that Spectrum is enthusiastic about CoCos because they offer a unique value for the market. This is not a global disaster for CoCos, this is a Credit Suisse event and this is a Swiss bank regulation event.