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Investment outlook

Credit Suisse: Nuveen exposure and banking outlook

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What happened?

On 15 March, 2023, the Saudi National Bank announced it was near its ownership limit of 10% for Credit Suisse Bank. The market reacted negatively because it was expecting the Saudi National Bank to provide continued support during the three-year transition period. This development and U.S. banking uncertainty sparked a sharp decline in Credit Suisse’s stock price and its bonds dropped to distressed levels.

That same day, the Swiss National Bank (SNB) offered rescue funds to Credit Suisse, but the gesture did little to quell concerns. We would later learn that client outflows actually accelerated during this time, topping approximately $10 billion per day.

On Sunday 19 March, the Swiss Financial Market Supervisory Authority (FINMA) announced its approval of UBS’s purchase of Credit Suisse for about 40% of Credit Suisse’s market capitalization. UBS was incentivized to acquire Credit Suisse via a CHF100 billion liquidity facility from the SNB, as well as a CHF9 billion backstop from the Swiss government to cover potential losses resulting from Credit Suisse acquisition.


What about AT1 CoCos?

FINMA determined that Credit Suisse had received an “irrevocable commitment of extraordinary support from the public sector,” given the incentives provided to UBS to consummate the acquisition. As a result – and to bolster capital at the combined institution to lower the likelihood of the Swiss government realizing a loss via the CHF9 billion backstop – FINMA announced that Credit Suisse AT1 CoCos (additional tier 1 contingent capital securities) would be written down to zero. This affected approximately $17 billion of Credit Suisse AT1 CoCo securities.

Swiss banks are regulated by FINMA, while European banks are regulated by the European Central Bank. As a result, key differences exist between the Swiss and European banks’ treatment of AT1 securities in a viability event.

We disagree in principle with FINMA’s decision to not write down Credit Suisse common equity before the AT1 CoCos. Importantly, Credit Suisse itself stated that AT1 CoCo ranked above the common equity investors during a viability event, as highlighted in the “Credit Suisse Fixed Income Investor Presentation” dated 14 March, 2023.

Bank treatment of AT1 securities

  Swiss Banks European banks
Common equity

May/may not be required to write down common equity prior to a writedown of AT1 CoCos.

Required to write down common equity prior to a writedown/conversion of AT1 CoCos.

AT1 Securities

Require a full writedown of AT1 securities.

May exercise a partial writedown/conversion of AT1 CoCos.

Dividend stopper language

Have ‘dividend stopper’ language protecting coupon payments on AT1 CoCos.

Prohibited in AT1 CoCos issued by European banks under ECB rules.

Dividend stopper language stipulates that if a dividend has been made to the common shareholder, then distributions to AT1 CoCos must also be made.

What are Nuveen’s holdings in dedicated preferred products?

We had below-benchmark exposure to Credit Suisse in the Nuveen Preferred Securities and Income Fund and several closed-end funds. Nuveen preferred securities separately managed accounts do not have any exposure, as they are prohibited from purchasing and from holding CoCos.

Nuveen Preferred Securities and Income Fund holdings

Credit Suisse (%) AT1 CoCos (%)
Nuveen 3.6 32.9
Blended benchmark 4.3 40.0

Data as of 28 Feb 2023. Blended benchmark is 60% ICE BofA U.S. All Capital Index/40% ICE USD Contingent Capital Index.

What is Nuveen’s outlook for the European bank sector?

We see meaningful differences between the regulatory treatment of Swiss and European bank AT1 CoCos, and don’t believe the experience of Credit Suisse AT1 CoCos should be applied to the broader European bank AT1 CoCo market. The Bank of England and European banking regulators both came out with statements on 20 March confirming that common equity instruments would be the first securities to absorb losses.

UBS’s acquisition of Credit Suisse provides resolution to one of the most significant headlines overhanging the European bank sector. As a result, we feel this dramatically decreases the sector’s risk profile.

We maintain a constructive outlook on the European bank sector because these institutions are well capitalized on an absolute basis, and on a relative basis versus their U.S. counterparts. Because European banks have a higher percentage of insured deposits than U.S. banks, we don’t expect the same level of risk that we are seeing in the U.S.

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