One of the elements in the takeunder by UBS of Credit Suisse was that CHF 16 billion (about $17.3 billion) in CoCo bonds got wiped out totally, while shareholders got wiped out only almost totally. Swiss regulator FINMA, when announcing the deal on Sunday, said that CoCo bonds would be written down to zero, in a sense subordinating bondholders to shareholders, which is like a total no-no very-bad-boy thing to do, because normally, shareholders would get totally wiped out first, and then bond holders would start taking their turn.
Turns out, there were some clauses in the documents of the CoCo bonds, issued in Switzerland, that allowed this under certain conditions and triggers. But no one ever reads any clauses, and so it came as a surprise, shaking up the $275 billion market for these creatures that came out of the swamp of the Financial Crisis.
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What tripped folks up was that shares of Credit Suisse didn’t get totally wiped out first. The buyout offer by UBS was an exchange of one UBS share for 22.48 Credit Suisse shares, which valued Credit Suisse shares at roughly CHF 0.76 (down 99% from the peak in 2007) and down 60% from the close on Friday. Maybe this was a nod toward institutional investors in the Middle East that had poured so much money into Credit Suisse.
So shareholders are getting some peanuts. CoCo bondholders had been under the impression – not having read the clauses – that their CoCos would be senior to common shares, and that they’d get some peanuts, if shareholders get peanuts. But now, they aren’t getting anything, not even a single peanut. ...
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