Eric Vanraes, Portfolio Manager of the Strategic Bond Opportunities Fund at Eric Sturdza Investments, has distributed a warning on the consequences of the Credit Suisse debacle.
In the past week, Credit Suisse was acquired by UBS in a deal supported by the Swiss government. The move was designed to halt looming financial contagion as protestations that all was fine were ignored by the masses, and a possible run-on-the-bank scenario could have caused further damage.
As part of the takeover of Credit Suisse, all Tier 1 debt was wiped out. Yesterday, it was reported that a legal challenge may be in the offing.
Vanraes stated that if Silicon Valley Bank was the first signal the collapse of Credit Suisse “should serve as a warning of a potentially deeper crises.”
“I say ‘potentially’ because the good news is that we experienced Lehman Brothers in 2008 and so this is not the first time we have been through such trauma. We can only hope, therefore, that all the right lessons are learned and applied, said Vanraes. “In the meantime, many investors have discovered that their Credit Suisse AT1’s were subordinated to equities and [are] now worthless. This is unprecedented and discredits subordinated debt in banks and the asset class in general. In the short term, the AT1 market will suffer. In the medium term, it will undoubtedly offer opportunities to those specialists who can analyse this type of instrument and read a prospectus’ fine print.”
Vanraes added that hybrid corporate debt has also come under pressure even though the asset class has nothing to do with AT1 bonds.
“In a panic, investors have lumped everything together and simply sold off anything that looked like subordinated debt. This will take a few days to settle, and as is often the case, the wheat will eventually be separated from the chaff.”
On Wednesday, the US Federal Reserve will announce its decision on interest rates which may determine which direction the markets will take in the short run. In the long run, global regulators have a bigger challenge of looking in the rearview mirror, realizing what they did wrong and, hopefully, taking action to mitigate similar events in the future. Of course, this does not mean the next financial crisis is just around the corner…