The decision by Swiss authorities to wipe out Credit Suisse's Additional Tier 1 (AT1) bonds could reduce demand for this type of bonds in the long term, a Goldman Sachs strategist said, but risk of contagion across credit markets was limited due to the relative niche nature of the asset class.
Some $17 billion worth of AT1 Credit Suisse bonds will be written down to zero on the orders of the Swiss regulator as part of a rescue merger with UBS
AT1 bonds issued by other European banks fell sharply on Monday as the treatment of Credit Suisse AT1 bondholders highlighted the risks of investing in this type of debt. But, he added: "In the long term, we are a little concerned about the potential permanent destruction in demand ... I do think that investors will have to re-assess how the risk-reward looks like in those instruments, particularly at times of rising financial distress."act as shock absorbers if a bank's capital levels fall below a certain threshold. They can be converted into equity or written off.
For Karoui, the risk that a re-assessment of the risk of this type of securities could affect the performance of the broader credit market remained limited due to the size of the AT1 market and its investors.
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