Deepak Shenoy, the founder and CEO of wealth management fintech startup, Capitalmind, sincerely believes that AT1 bonds are worse than equity as an investment option.
What Happened? After UBS announced Credit Suisse’s take-over on Sunday, Swiss financial regulator FINMA ordered that $17 billion (₹1,40,504.19 crore) worth of Credit Suisse’s additional tier one (AT1) bonds will be written down to zero.
Shenoy, who had posted a detailed thread on why he feels AT1 bonds are extremely toxic investments back in 2020, retweeted the thread to reiterate his belief on Monday. The fintech founder shared his original take on AT1 bonds when Yes Bank’s bonds were written down by the RBI as part of the bank’s revival plan in 2020.
According to Shenoy, AT1s are worse than equity for two primary reasons — “coupon discretion and loss absorption.” Breaking down Shenoy’s take, AT1 bonds are riskier because they have no maturity date. Their interest payments are also not guaranteed.
In times of financial strain, AT1 bonds can also be written off entirely, as has happened in the case of Credit Suisse and Yes Bank, which translates to a loss of investment for bondholders.
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AT1 bonds came into being after global banks came together to formulate Basel III norms. Now, these norms aim at safeguarding the international banking system.
“Mutual funds have bought them showing that they are like bonds. But they are not, and everyone knew that and no one assumed there will be a point of non-viability event,” says Shenoy.
“It’s like people writing software saying you can’t have negative growth rates for housing prices. And then wonder why the models were wrong,” he adds.
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