Equity holders bear losses before holders of AT1 bonds: MAS
Under the takeover deal of Credit Suisse by UBS, holders of additional tier 1 one (AT1) bonds absorbed losses ahead of equity investors, a move many said went against convention.
SINGAPORE: In the event that a Singapore financial institution (FI) is liquidated, its equity holders will absorb losses before the holders of additional tier 1 (AT1) and tier 2 instruments, the Monetary Authority of Singapore (MAS) said on Wednesday (Mar 22).
Under the takeover deal of Swiss lender Credit Suisse by UBS, holders of the bank's AT1 bonds will get nothing, while shareholders, who usually rank below bondholders in compensation terms, will receive US$3.23 billion.
The revelation was a rude shock for the holders of Credit Suisse's riskiest tranche of bonds, as it bucked a long-established practice of giving bondholders priority over shareholders in debt recovery.
The deal wiped out the investments of bondholders, which were worth about 16 billion Swiss francs (US$17 billion).
There have also been reports of bondholders considering possible legal action.
Singapore's central bank said that it intends to abide by the hierarchy of claims in liquidation.
"Creditors who receive less in a resolution compared to what they would have received had the FI been liquidated would be able to claim the difference from a resolution fund that would be funded by the financial industry," said MAS.
"The creditor compensation framework will also apply in the exceptional situation where MAS departs from the creditor hierarchy in order to contain the potential systemic impact of the FI’s failure or to maximise the value of the FI for the benefit of all creditors as a whole."
European regulators, including the Bank of England and the European Central Bank, have also said that AT1 bonds should be paid out before equity instruments.
UBS announced on Wednesday a buyback of 2.75 billion euros (US$2.96 billion) worth of debt in a bid to boost confidence among bondholders.
The bonds will be bought back at the price at which they were sold rather than at market prices, compensating investors after a sell-off this week.
MAS added that its resolution framework is in line with the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions.
The central bank noted that AT1 bonds in Singapore are offered in the wholesale market, which is only for institutional investors, accredited investors or transactions in denominations of at least S$200,000.
MAS said that there has been no registration of any prospectus concerning the offering of AT1 bonds to retail investors.
"As with other investment products, FIs that offer or distribute AT1 bonds are expected to make accurate and clear disclosures of key product features and risks to investors.
"Investors should understand the risks and rewards, and exercise due care in their selection of investment products."