Benzinga: Remember Credit Suisse’s AT-1 Bonds Fiasco?

April 3, 2023

Why Mitsubishi UFJ postponed its bond issuance?

Running Point Capital and its chief investment officer, Michael Ashley Schulman, CFA, were referenced by Benzinga in an article — by Bhavik Nair, Remember Credit Suisse’s AT-1 Bonds Fiasco? Here’s Why MUFG Reportedly Delayed Issuing These Instruments — regarding Mitsubishi UFJ Financial Group Inc’s delay in issuing additional tier-1 (AT1) bonds.

Who invests in AT1 bonds?

The main investors in AT1 or contingent collateral (CoCo) bonds are investment professionals, institutional investors, and hedge funds; AT1 bonds are not on the usual menu for individual or retail investors. They are the lowest-ranked bank debt, a legacy of the European debt crisis, and offer attractive returns in good times but take the first hit when a bank has capital problems. The professionals investing in AT1s should understand the risks, even if that includes gvoernments re-interpreting capital structure (in an emergency) as they see fit since CoCo bonds act as financial shock absorbers for a bank only when things go drastically wrong.

In the case with Credit Suisse last month, if a previously $100 billion bank can be sold for $3 billion, you can expect a major dent in investor confidence. Switzerland’s move caused investors to re-evaluate the entire CoCo bond market; the long-term consequence may be that this debt becomes more expensive for other banks around the world. To invoke game theory, if no one panics, everything may seem fine; but there seems to be a first mover advantage for anyone who runs from smoke.

Getting what you wished for—a double-edged sword

Ironically, a year ago, most bank analysts were encouraging and hopeful about interest rate raises because they saw net interest margin (NIM) and bank profitability increasing. However, this was a double-edged sword because it lowered the value of hold to maturity bonds on the banks’ balance sheets (especially if the holdings were not hedged to rising interest rates).

Quoted article excerpt is below:

Michael Ashely Schulman, partner and chief investment officer at Running Point Capital Advisors had earlier warned about the issue, according to a Reuters report. “It’s going to make the AT1 bonds more expensive for all the other banks going forward because now everyone else is going to see this extra risk,” he had said.

Benzinga regarding Mitsubishi UFJ
Mitsubishi UFJ Bond Issuance  — Graphics and design by

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