Market Update – Credit Suisse.

As I am sure you are all aware, over the weekend UBS agreed to buy Credit Suisse for CHF3bn (£2.65bn) in an all-share deal.

This value is less than half of Credit Suisse’s market value as at Friday (17 March 2023) – and around 10% of what Credit Suisse was valued at just 12 months ago.

The deal was brokered by the Swiss government with the clear aim of containing a crisis of confidence that threatened to spread across global financial markets – and the speed that governments and central banks have responded shows that they have learnt a lot since the 2008/9 global financial crisis.

However, unfortunately while governments and central banks have avoided repeating the 2008/9 mistakes, they appear to have made a new one!

As a result of the deal structure, Credit Suisse’s CHF16 bn (£14.1 bn) Additional Tier 1 bonds (AT1 bonds) have been completely written-down.

Although these AT1 bonds are known to be risky, as they ranked behind other creditors such as depositors and subordinated bonds, this write-down is controversial as it changes the hierarchy between AT1 bonds and ordinary shares.  Normally shareholders would be wiped-out before AT1 bonds – and so by wiping-out the AT1 bondholders, but allowing shareholders to participate in the future recovery via a shareholding in UBS, means that banks may need to find new sources of capital as going forward investors will be more wary over buying AT1 bonds and as such, will want a much higher return to compensate them for the increased risk.

As a consequence banks are likely to be more cautious about lending and as such financial conditions are likely to tighten and economic growth is likely to slow further, which in turn is likely to put a limit on how much higher central banks can increase interest rates (the Fed will meet on Wednesday 22 March 2023 and the BoE, the following day).

As for our client portfolios, our strict risk parameters and thorough research means that we don’t own any AT1 bonds within the Income Element, although we do own collective funds (ETF, OEICs and unit trust) in the Growth Element, which can own AT1 bonds.

As for equity markets, the FTSE-100, having been down just over 1.7% shortly after the market opened this morning, is now up 20 points (0.25%) on the day at 7,355 – although unsurprisingly, banks are among those companies that remain down on the day.  As we write, HSBC is down 2.3% while NatWest and Lloyds are both 1.3% lower.

Investment Management Team

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