Credit Suisse's 'CoCo' bonds: How $17b disappeared

A photo taken on 20 March 2023 shows a branch of Swiss bank Credit Suisse in downtown Milan.

The forced sale of Credit Suisse to UBS has renewed attention on CoCo bonds, a hybrid security created after the 2008 global financial crisis to reinforce banks, as the transaction wiped out $17 billion of the market worth more than $250 billion.


Regulations require banks to maintain certain levels of equity, or capital, to absorb losses or demands for withdrawals from depositors. Regulators review banks every year to set the required levels.

The European Central Bank describes equity capital as a cushion for losses and the greater the risks a bank takes on, the more equity capital it needs.

This money comes from shareholders who have bought shares, undistributed profits, and certain risky debt instruments. One such type are CoCo bonds.

Debt hierarchy

Debt instruments are ranked into several categories by the risks they present to investors and their pecking order in case of reimbursement in case the bank encounters financial difficulties.

At the top is "senior" debt, which is secured by collateral and is the first to be repaid in case of a default.

At the bottom, with little chance of repayment, are CoCos, which stands for Contingent Convertible, and is also called "Additional Tier 1" or "AT1" debt.

It is an asset class that was created after the 2008 financial crisis to provide an option to reinforce the capital of banks without issuing new shares and to help avoid taxpayers having to bear the cost of bailouts.

CoCos come with the risk that if a bank's equity capital falls below required levels they can be converted into shares or just wiped out.

"To compensate for these risks these instruments offer higher rates than normal bonds," said Eric Dor, head of economic research at the IESEG business school.

Attractive investments

The risk premium made AT1 investments very attractive in a low interest rate environment.

The AT1 market is estimated to be worth over $250 billion, with the majority of the bonds issued by European and British banks.

In early 2021 Credit Suisse fixed income portfolio managers described CoCos as an "attractive investment opportunity in the current environment," although they noted "a conversion or write-down can also be one of the tools used when a bank is deemed to have reached a point of nonviability" although there had not been such a case since the 2017 resolution of Spain's Banco Popular.

Some $17 billion in Credit Suisse CoCos were zapped as part of the USB buyout of Credit Suisse.

"It also represents the most significant loss ever inflicted on AT1 investors since the birth of the asset class post-global financial crisis," said Stephen Innes, managing partner at SPI Asset Management.

Write-off controversy

The CoCo write-off or "bail-in", announced by Swiss financial regulators, surprised observers as shareholders are supposed to bear the greatest risk of losing their investments.

However, shareholders are getting three billion Swiss francs as part of the buyout.

"It is surprising that shareholders are keeping something while AT1 creditors lose everything," said IESEG's Dor.

The European Central Bank, in a thinly veiled criticism of Swiss authorities, said on Monday that it would take a different approach.

"In particular, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down," it said.

The Bank of England made a similar statement.

"The reiteration by the ECB and the Bank of England of the bail-in pecking order of bank insolvency, or bankruptcy has also helped to assuage some nervousness around the AT1 market," said CMC Markets analyst Michael Hewson.

"However, today's events are still a reminder that just because you are higher up the pecking order when it comes to being bailed in, it doesn't mean you won't still get wiped out," he added.