Additional Tier 1 (AT1) bonds

Well I looked a bit more into the matter and it appears that:

  • AT1 bonds can be written off if CET1 capital falls below 7%. It’s not the case here, but that would be a case where AT1 bondholders would get zero while shareholders would still get something
  • AT1 bonds are written off in case of a “viability event”, i.e an intervention of the government because there are serious doubts about its solvency…

Well, good thing that i don’t invest in financials. Once again I am reminded that I don’t know half of what I should know before underwriting this kind of company…


It doesn’t have any impact on CS funds (or deposits).

FYI AT1 bonds are not just any kind of bond, those were created after the GFC and are meant to be wiped in case of intervention or low capital.

(To avoid taxpayers footing the bill)

Afaik other CS bonds are not impacted.

I think the surprise for the market is that some folks thought equity would be wiped before AT1 but apparently this is not necessarily the case in CH and this should be documented as such. So maybe some investors took a bit too much risk.


Helfpul Bloomberg explainer on AT1 bonds or CoCos


That’s what I understand after some research as well.
That’s really a crappy instrument: in good times, you have a capped upside (because it is fixed income), but in bad times, you have a worse outcome than the common stock…
The devil’s touch was to call these instruments “bonds” so that unsuspecting investors think they are ahead of the common stock in the capital structure…

Conclustion: always, always read the termsheet.


I’m still trying to understand AT1 bonds. CS seems to call them " Perpetual Tier 1 Contingent Write-down Capital Notes". Notes is a term often associated with bonds but the use of technical language and the convoluted name could be a clue for investors that these are more complex than your run off the mill average bond.

To my understanding, the fun thing, though, is that they are, indeed, ahead of common stock in case of liquidation, assuming common stock ranks as “Junior Capital” per the Information Memorandum that accompanies them on the CS site: Capital Instruments Disclaimer

The obligations of the Issuer under the Notes are subordinated.

In the event of the liquidation, dissolution or winding-up of CSG prior to a Write-down having occurred, the rights and claims of Holders against CSG in respect of or arising under (including, without limitation, any damages awarded for breach of any obligation under) the Notes shall rank junior to all claims of Priority Creditors, pari passu with Parity Obligations and senior to the rights and claims of all holders of Junior Capital.

The quirk is that they don’t need to survive until liquidation and are meant to be written off before that happens, in which case they don’t exist anymore when the time to rank creditors and stockholders due to a liquidation happens.

They can be written down to zero under specific conditions that are detailed in the chapter 7, from page 49 onward of the Information Memorandum. One is low capitalization, which is linked to the publication of the “Financial Report” and cannot be given later than 5 business days after the publication of such report.

FINMA seems to have used the occurrence of a “Viability event”, though, which is the other situation in which they can be written off. Those terms are:

(A) the Regulator has notified CSG that it has determined that a write-down of the Notes, together with the conversion or write-down/off of holders’ claims in respect of any and all other Going Concern Capital Instruments, Tier 1 Instruments and Tier 2 Instruments that, pursuant to their terms or by operation of law, are capable of being converted into equity or written-down/off at that time, is, because customary measures to improve CSG’s capital adequacy are at the time inadequate or unfeasible, an essential requirement to prevent CSG from becoming insolvent, bankrupt or unable to pay a material part of its debts as they fall due, or from ceasing to carry on its business; or

(B) customary measures to improve CSG’s capital adequacy being at the time inadequate or unfeasible, CSG has received an irrevocable commitment of extraordinary support from the Public Sector (beyond customary transactions and arrangements in the ordinary course) that has, or imminently will have, the effect of improving CSG’s capital adequacy and without which, in the determination of the Regulator, CSG would have become insolvent, bankrupt, unable to pay a material part of its debts as they fall due or unable to carry on its business.

They seem to have used the point (B) above, in which case the timeline would have been:

  1. CS had inadequate capital and improving that was either inadequate or unfeasible and CS would have been insolvent, bankrupt, unable to pay a material part of its debts as they fall due or unable to carry its business without irrevocable commitment of extraordinary support from the Public Sector (which I guess could be considered as having happened when the SNB stood at disposal to provide CS with liquidity).

  2. The AT1 bonds were written off.

  3. CS now had sufficient capital to make its absorbtion by UBS a viable outcome and UBS bought it.

The regulators would probably argue that writting off the bonds and allowing UBS to buy CS were absolute mandatory steps, which justifies the outcome that AT1 bonds were liquidated before shareholders equity, but I can see some AT1 bondholders wanting to attack that decision, especially since the regulators specifically stated a few days earlier that CS had enough capital to meet or exceed their regulatory requirements.

As a side note, the Information Memorandum is very clear about how risky the instrument is and no investor having done their due diligence should have expected not to be wiped out as CS was going down in my opinion. I can understand a potential will of discussing shareholders not getting wiped out first, but my guess is the AT1 notes would have been written off no matter what.

Edit: Also and as another side note, funny the investment vehicles we discover exist when things go belly up. It is very humbling and makes you rethink those risk tolerance questionnaires that let you “register” as an expert in financial products because you “know” some derivatives (options and futures, mostly)…


Well, I was looking at AT1 bonds at some point, read their description, googled up an article about an Indian bank that went belly up, AT1 bonds were written off, lots of retail investors had no idea what they were buying (or were probably misinformed by financial “advisors”) and had experienced a total loss on this instruments.

I had got horrified and forgotten about AT1.


Please have a second look at AT1 Bonds, its a very good investment actually. Banks tend to distribute their earnings to bond holders first, then to their staff (bonuses) and shareholders come last. In this context, its financially not attractive to hold shares of (at least European) banks.

AT1 bonds however are guaranteed to give you ~ 6-8% of yield. This with a relatively low risk profile. Clearly, (non-Bank) shares will one year go up by 40%, but the next they go down 20%. A relatively smooth and straight 6-8% return is fairly attractive. This is particularely the case as returns / coupons are non-taxable.

There is further no risk of mixing them up with normal bonds, AT1 are generally sold in lots of 100k and clearly intended for professional investors only.

CS is the first material write-off ever since AT1 is in place (Santander AT1 if I remember correctly had a 1.2B loss). The only thing we need to remember is that before Corona, too much money went into all markets and they as well became part of the „Everything Bubble“. CS in September wrote a new AT1 at a ~10% Coupon, which based on the risk profile back then was too low already. Personally, I stepped out of the AT1 Market in early 2019; but I will get back to it once Interest Rates are stable again, which should be latest in a year.

How to invest: in the meantime, there are UCITS ETF, historically there was the Swisscantl Fund as well (at a terrible ER). Yet, still to show you how valuable the asset class is… just have a look at its long term performance since 2012?

This is a bad time for a few asset classes but AT1 is a very lucrative asset class that every afluent investor should keep on their market. This particularely as these instruments won‘t make it into ordinary bond indices and a truly oassive approach justifies a (tiny) allocation at least.

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Today’s Matt Levine edition about Credit Suisse (here)is really really good. In particular the explanation about AT1 Bonds:


After the 2008 financial crisis, European banks issued a lot of what are called “additional tier 1 capital securities,” or “contingent convertibles,” or AT1s or CoCos. The way an AT1 works is like this:

  1. It is a bond, has a fixed face amount, and pays regular interest.
  2. It is perpetual — the bank never has to pay it back — but the bank can pay it back after five years, and generally does.
  3. If the bank’s common equity tier 1 capital ratio — a measure of its regulatory capital — ffalls below 7%, then the AT1 is written down to zero: It never needs to be paid back; it just goes away completely.

This — a “7% trigger permanent write-down AT1” — is not the only way for an AT1 to work, though it is the way that Credit Suisse’s AT1s worked. Some AT1s have different triggers. Some AT1s convert into common stock when the trigger is hit, instead of being written down to zero; others are temporarily written down (they stop paying interest) when the trigger is hit, but can bounce back if the equity recovers. (Here is a 2013 primer on CoCos from the Bank for International Settlements.)

These securities are, basically, a trick. To investors, they seem like bonds: They pay interest, get paid back in five years, feel pretty safe. To regulators, they seem like equity: If the bank runs into trouble, it can raise capital by zeroing the AT1s. If investors think they are bonds and regulators think they are equity, somebody is wrong. The investors are wrong.

In particular, investors seem to think that AT1s are senior to equity, and that the common stock needs to go to zero before the AT1s suffer any losses. But this is not quite right. You can tell because the whole point of the AT1s is that they go to zero if the common equity tier 1 capital ratio falls below 7%. Like, imagine a bank:

  • It has $1 billion of assets (also $1 billion of regulatory risk-weighted assets). 6
  • It has $100 million of common equity (also $100 million of regulatory common equity tier 1 capital).
  • It has a 10% CET1 capital ratio.
  • It also has $50 million of AT1s with a 7% write-down trigger, and $850 million of more senior liabilities.

This bank runs into trouble and the value of its assets falls to $950 million. What happens? Well, under the very straightforward terms of the AT1s — not some weird fine print in the back of the prospectus, but right in the name “7% CET1 trigger write-down AT1” — this is what happens:

  • It has $950 million of assets and $50 million of common equity, for a CET1 ratio of 5.3%.
  • This is below 7%, so the AT1s are triggered and written down to zero.
  • Now it has $950 million of assets, $850 million of liabilities, and thus $100 million of shareholders’ equity.
  • Now it has a CET1 ratio of 10.5%: The writedown of the AT1s has restored the bank’s equity capital ratios.

This, again, is very explicitly the whole thing that the AT1 is supposed to do, this is its main function, this is the AT1 working exactly as advertised. But notice that in this simple example the bank has $950 million of assets, $850 million of liabilities and $100 million of shareholders’ equity. This means that the common stock still has value. The common shareholders still own shares worth $100 million, even as the AT1s are now permanently worth zero.

The AT1s are junior to the common stock. Not all the time, and there are scenarios (instant descent into bankruptcy) where the AT1s get paid ahead of the common. But the most basic function of the AT1 is to go to zero while the bank is a going concern with positive equity value, meaning that its function is to go to zero before the common stock does.

Credit Suisse has issued a bunch of AT1s over the years; as of last week it had about CHF 16 billion outstanding. Here is a prospectus for one of them, a $2 billion US dollar 7.5% AT1 issued in 2018. “7.500 per cent. Perpetual Tier 1 Contingent Write-down Capital Notes,” they are called.

In UBS’s deal to buy Credit Suisse, shareholders are getting something (about CHF 3 billion worth of Credit Suisse shares) and Credit Suisse’s AT1 holders are getting nothing: The Credit Suisse AT1 securities are getting zeroed. This is not, to be clear, exactly because Credit Suisse’s CET1 capital fell below 7%; instead, there is a separate clause of the AT1s allowing them to be zeroed if the bank’s regulator decides that zeroing them is “an essential requirement to prevent CSG from becoming insolvent, bankrupt or unable to pay a material part of its debts as they fall due.” 7 Plus, in a situation like this, the banking regulators get to do a certain amount of ad hoc stuff, and they do. (They got rid of the shareholder vote on the deal!) Zeroing the AT1s while preserving a little value for the common does seem to have been done in an ad hoc way; my point is just that it follows very logically from the terms and function of the AT1s.

People are very angry about this. Bloomberg News reports:

The clauses that led to the bonds being marked to zero aren’t common. Only the AT1 bonds of Credit Suisse and UBS Group AG have language in their terms that allows for a permanent write-down and most other banks in Europe and the UK have more protections, according to Jeroen Julius, a credit analyst at Bloomberg Intelligence. …

“This just makes no sense,” said Patrik Kauffmann, a fixed-income portfolio manager at Aquila Asset Management, who holds Credit Suisse CoCos. “Shareholders should get zero” because “it’s crystal clear that AT1s are senior to stocks.”

The Financial Times adds:

“In my eyes, this is against the law,” said Patrik Kauffman, a fund manager at Aquila Asset Management, who invests in additional tier 1 (AT1) bank debt.

He said it was “insane” that under the terms of UBS’s takeover of Credit Suisse, AT1 bondholders were set to receive nothing while shareholders would walk away with SFr3bn ($3.2bn). “We’ve never seen this before. I don’t think this would be allowed to happen again.”

Davide Serra, founder and chief executive of Algebris Investments, said the move was a “policy mistake” by the Swiss authorities. “They changed the law and they have basically stolen $16bn of bonds”, he said in a widely attended call on Monday morning.

I’m sorry but I do not understand this position! The point of this AT1 is that if the bank has too little equity (but not zero!), the AT1 gets zeroed to rebuild equity! That’s why Credit Suisse issued it, it’s why regulators wanted it, and it would be weird not to use it here.

Oh, fine, I understand the position a little. The position is “bonds are senior to stock.” The AT1s are bonds, so people bought them expecting them to get paid ahead of the stock in every scenario. They ignored the fact that it was crystal clear from the terms of the AT1 contract and even from the name that there were scenarios where the stock would have value and the AT1s would get zeroed, because they had the simple heuristic that bonds are always senior to stock.

That’s the trick! The trick of the AT1s — the reason that banks and regulators like them — is that they are equity, and they say they are equity, and they are totally clear and transparent about how they work, but investors assume that they are bonds. You go to investors and say “would you like to buy a bond that goes to zero before the common stock does” and the investors say “sure I’d love to buy a bond, that could never go to zero before the common stock does,” and the bank benefits from the misunderstanding.

We talked about CoCos a few years ago due to a different misunderstanding. CoCos generally are perpetual — they never need to be paid back — but the bank is allowed to repay them after, usually, five years (the “first call date”). It is customary for banks to repay CoCos at the first call date (because they are like bonds), but it is not required, and in fact bank regulators go around saying that banks shouldn’t make too much of a habit of repaying them. “A bank must not do anything which creates an expectation that the call will be exercised,” say the rules, because the regulators do not want CoCos to be too bond-like.

And so one day four years ago Banco Santander SA did not call its AT1s after five years, and the market freaked out. “Santander’s decision is raising questions about whether investors will start souring on AT1s across the board,” said the Wall Street Journal at the time, “which could force European banks to rethink a key way in which they have cushioned themselves against potentially catastrophic losses since the global financial crisis.” I was unmoved. I wrote:

If the regulators think that AT1s are equity and the investors think that they’re debt, someone is wrong, and much better for the investors to be wrong!

Since then I have become very convinced that regulators know how AT1s work, and that investors don’t, and that this is good.

Anyway there are once again threats that this is the end of the AT1 market, that no one will ever buy these securities again, etc., threats that are familiar from the Santander situation four years ago. Bloomberg:

Market participants say the move will likely lead to a disruptive industry-wide repricing. The market for new AT1 bonds will likely go into deep freeze and the cost of risky bank funding risks jumping higher given the regulatory decision caught some creditors off-guard, say traders.

That would give bank treasurers fewer options to raise capital at a time of market stress, with the Federal Reserve and five other central banks announcing coordinated action on Sunday to boost dollar liquidity.

And my Bloomberg Opinion colleague Marcus Ashworth:

The entire banking sector will end up paying for Credit Suisse’s myriad transgressions one way or another. The repercussions of the Swiss takeover structure may close off access to CoCos for all but the strongest banks — the definition of which will come under ever-closer scrutiny.

To be fair, most AT1s outside of Switzerland don’t work like this — they tend not to be permanent write-down AT1s — and so it is not clear why the Credit Suisse writedown should affect the prices of other AT1s:

European regulators are rushing to reassure investors that shareholders should face losses before bondholders after the takeover of Credit Suisse Group AG wiped the bank’s Additional Tier 1 debt.

The clauses that led to the bonds being marked to zero aren’t common. Only the AT1 bonds of Credit Suisse and UBS Group AG have language in their terms that allows for a permanent write-down and most other banks in Europe and the UK have more protections, according to Jeroen Julius, a credit analyst at Bloomberg Intelligence.

It is just possible that the explanation is that AT1 investors don’t read the terms of their securities? Anyway European Union and UK banking authorities put out statements saying in effect that they would never do what the Swiss authorities did here, and that (in the Bank of England’s words) “AT1 instruments rank ahead of CET1 and behind T2 in the hierarchy. Holders of such instruments should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy.” If you read that very closely, it does not quite say that AT1 instruments can’t be written off in a shotgun merger over the weekend that preserves some value for the equity (not “resolution or insolvency”!), but I guess there’s no reason to read it too closely.


…and even some fixed-income portfolio managers or founders and CEOs at investment companies apparently have been tricked into that belief. So far as to even spread it and through the media.

If banks can be too big too fail™, can a bank also become too big to be rescued?


I think those guys knew about the risk. Now they have to take responsibility in front of their clients/investors. Easier to say: “hey it says bonds we thought it were bonds” than “we have a lousy risk management”.

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We thought it‘s this - but actually it isn’t“ doesn’t sound very confidence-inspiring to investors. You don’t want to caught going on public record with that. In hindsight or under the spotlight most things seem crystal clear - when they weren’t before, even to finance professionals.

Some, maybe many. But far from all of them, I’m pretty sure - unless they‘ve been specialising exactly in such “bonds“. While we’re at that…

…and an ETF on them got only three :banana: :banana: :banana: out of seven :banana: :banana: :banana: :banana: :banana: :banana: :banana: on the risk indicator scale.:


6 - 8 yield guaranteed, at a lower risk than MSCI World?

Sign me up!
:money_with_wings: :monkey:

You get 6-8%, unless you hit a banking crisis; and then you get a -100%. This is a great investment but neither in times of stress in the banking system; nor in a negative interest rate scenario where yields were compressed to ridiculously low levels. So this is not a Buy and Hold investment - as said, I sold my (back then) Swisscanto AT1 fund in 2019. Lets wait until the banking system is stable again, and until we have reached stability on interest rates. Then - its time to invest part of your Non-Volatility Assets into AT1. But this always with a stop loss at which you auto-convert back into ordinary bonds.

Time for me to get back into the Ghosting mode. Just wanted to point out these two things as they are quite important in the overall discussion.

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But to ride that :rocket: when it’s launched, shouldn’t you invest when the proverbial blood hits the streets?


Generally, AT1 Bonds are perpetual and with an Interest that equates to a 5 year swap rate plus X% risk uplift. The 5 year swap rate is re-calculated every 5 years. In normal times, AT1 therefore come with a duration of 5 years (which is better than shares) and the X is somewhere in the range of 5-8%. X generally depends on the trigger (when conversion happens) and what happens post the trigger (conversion into shares or write-off).

Negative interest rates we had lead to a funny situation: everyone was chasing yield. Even though the low/negative interest rate was already incorporated into the 5 year Swap, the monetary tsunami lead to a reduction in X.

What this now means is quite simple: Interest Rate Normalisation lead to a write off on the swap‘s 5 year duration. This is technically no issue (5 years is no big duration). But on top of this, interest normalization lead to a write off on the PERPETUAL duration of the X % that compensates for the default risk.

In my view, the Market has not full priced this in yet. AT1s are not such a liquid market than bonds or shares and it will probably take more new AT1 issuance until people realise that theX must get higher again - aka that the current bonds’ market value will permanently be below 100. this is particularely the case given a behaviorial anomaly we so far had on the AT1 markets. Issuers so far kept exercising their termination rights after the 5 years had passed. This mainly as the X had reduced and/or the improved the terms and conditons in their favor. So far, market participants are used to bonds that are paid back after 5 years and the market will probably need more time to realise, accept and price on that AT1s with two low X will no longer be paid back by issuers but going forward be kept perpetual.

Long story short - the Market is still in transition and stabilization. AT1 become interesting once interest rates no longer go higher (given their 5 years duration). This timing is less critical given we still just talk about 5 years only. But at the same time, we urgently must wait for both new AT1 issuance where people realise the X was higher again… and we need AT1s where people realise that the issuers will no longer buy-back but perpetually enjoy the too low X. Its just a tiny market where this realization (given low sample size) takes more time…


I do not know if this is the right place, otherwise just move or delete.

I have compared the AT-1 of all banks in Switzerland which are healthy in my opinion. I think that AT-1 are currently quite under pressure and therefore an investment opportunity arises.

Thereby the AT-1 of Lukb caught my eye:

ISIN: CH0475070238

Example yield from today:
Settlement: 04.04.23
Maturity: 13.11.25
Rate: 1.80%
Current Price: 80%
Redemption: 100% (hopefully)

Yield: 11%.

LUKB: Finanzinformationen - LUKB

SIX: 1.80 KBLU 19-99 Stock Price & Performance | LUK191 | SIX

Simple calculation: Bond- und Anleiherechner für Staats- und Unternehmens-Anleihen

As always, no guarantee.


Well, that’s the thing. The issuer has an option, but not an obligation, to repay the bond at the “maturity” term. I haven’t read information for this bond, but these are rather standard conditions. So probably the market is pricing in the fact that LUKB is not going to pay back. And why would they pay back a bond with low coupon to place a new one with a coupon according to the new market conditions, i.e. a high one?


The prospectus also says that if it isn’t paid back on that date, interest is reset to swap + 1.8% spread. Which I guess is quite low for a bank that has a de-facto state guarantee.

A little late maybe, but one of my favourite podcasts has done an episode which might be of interest:

Haven’t listened to this one though cause it’s not about asset allocation, which they usually cover (and is of more interest to me personally).