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Big investor in Credit Suisse bonds says ‘bail-in’ system worked

file photo: switzerland's national flag flies above the logo of swiss bank credit suisse in zurich
Switzerland's national flag flies above the logo of Swiss bank Credit Suisse at its headquarters in Zurich, Switzerland

One of the largest investors of the Credit Suisse bonds that were wiped out in 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 on Monday said it liquidated all its Credit Suisse positions during late market trading on Saturday before the contingent convertible debt, called CoCos among traders, were written down to zero in the UBS deal.

Bail-ins were included in the Dodd-Frank Act to protect US taxpayers after the collapse of Lehman Brothers in 2008 so that they would not bear the cost of a bailout. Now banks in difficulty will be bailed in by the holders of CoCos, formerly known as Additional Tier 1 bonds (AT1).

“Anybody that bought CoCos who didn’t think ‘bailed-in’ had their head in the sand. Nobody likes it when it happens, but that’s the whole idea behind CoCos,” Philip Jacoby, chief investment officer at Spectrum, told Reuters.

“It’s painful and it bleeds out to the entire system and that’s what happened. The bail-in worked,” he said, adding that the integrity of the financial system overrode everything else.

The firm’s exposure to Credit Suisse AT1s represented 1.32 per cent of Spectrum’s assets under management (AUM) on Feb. 28. Spectrum’s AUM was $21.4 billion on Dec. 31, when it was the fifth-largest holder of the debt, Refinitiv data shows.

In comparison, PIMCO Investment Management, which had AUM of $1.74 trillion as of Dec. 31, held about $775 million of the debt at the time. PIMCO declined to comment.

In 2021 and early 2022 Spectrum held about $400 million of Credit Suisse AT1 bonds, Jacoby said. The Credit Suisse debt represents about 12 per cent of the benchmark for CoCos, a massive slice of the ICE BofA US dollar contingent capital index (.MERCOCO), he said.

“It’s a big ship when you want to turn it…and it takes time,” he said. “We had been paring back in Credit Suisse, had an internal negative outlook for a little over a year.”

Yields on the AT1 bonds are higher than at the height of the European sovereign debt crisis a decade ago and spreads are about four standard deviations wider of their average over the prior three credit cycles, Jacoby said.

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

Spectrum is enthusiastic about CoCos as they offer “uncommon value” for the market, said Matthew Byer, the firm’s chief operating officer. “This is a Credit Suisse event and this is a Swiss bank regulation event, this is not a global disaster for CoCos.”

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