Credit Suisse’s AT1 debt write down to raise market prices for new issuances

This could hamper issuance of new AT1 in the future.

Credit Suisse’s write down of $17.2b additional tier 1 (AT1) debt will lead to higher costs when raising capital in the future, even in Asia, analysts said.

The CS writedown has highlighted to AT1 investors that they are at risk of taking heavy losses as part of any bail-in, according to S&P Global Ratings.

“We predict that investors will demand notably higher coupon rates for new AT1 instruments in future,” S&P said in a report.

Alicia Garcia Herrero, Natixis Asia Research's Chief Economist for Asia Pacific, echoed this. "A likely scenario is the financial sector will need to pay a higher cost when raising capital, which will also affect Asia, and it can lead to a selective approach and more constraints on credit growth ultimately," she said.

Both Guerrero and S&P noted that the extent to which this trend plays will vary for individual banks, jurisdictions, and instrument structures, as investors work through their revised perceptions of risk.

"Investors appear to worry that CS is not a standalone case as regards the safety of AT1 and other similar instruments. However, there are indeed differences in the capital framework in each market and other regulators have shown a different stance," Garcia Herrero noted.

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S&P expects the cost of regulatory capital to come under pressure and may lead to reduced regulatory capital flexibility across the sector.

“Banks with capital needs may have to reposition toward common equity raising or reduced distribution levels, or else curtail balance sheet expansion. This trend may improve the quality of capital for those banks but may also have implications for balance sheet strategies and lending capacity whether as part of a formal resolution or a market-based solution to help an ailing bank and protect its senior creditors,” the report stated.