According to a person with knowledge of the matter, bond king PIMCO lost around $340 million on a class of Credit Suisse bonds that were destroyed by the UBS acquisition, with the American investment manager’s overall exposure to the Swiss lender amounting to billions.
In a settlement that saw shareholders get $3.23 billion, Swiss regulators on Sunday decided to forgive about $17 billion of Credit Suisse’s Additional Tier 1 (AT1) debt. When it comes to who gets financial compensation when a bank or firm fails, shareholders typically come in last behind bondholders.
According to a source with knowledge of the situation, the value of Credit Suisse’s Additional Tier 1 (AT1) bonds in PIMCO’s mutual funds was around $340 million on Friday.
Moreover, the source, who spoke on the condition of anonymity, said PIMCO’s existing holdings of Credit Suisse bonds, excluding the AT1 debt, were worth more than $4 billion.
Furthermore, the source claimed that gains in PIMCO’s holdings of other Swiss lender bonds that have appreciated in value following a rescue merger with UBS had offset losses on the AT1 securities.
A type of contingent convertible debt known as AT1s is included in the capital reserves that banks are required by regulators to maintain in order to safeguard themselves in times of market turbulence.
However, Pacific Investment Management Co (PIMCO), a U.S.-based company, oversees more than $1.7 trillion in assets.
On Monday, some Credit Suisse bonds increased in value following the government-backed bailout of the troubled institution.
For instance, according to Tradeweb statistics, the price of roughly $2 billion in notes due in 2026 increased from 66 cents on Friday last week to 87.5 cents on Monday.
As a result of the treatment of Credit Suisse AT1 bondholders, AT1 bonds issued by other European banks saw a steep decline on Monday. This underlined the risks associated with investing in these instruments.
Nevertheless, European regulators made an effort to halt the market collapse by arguing that, unlike what happened at Credit Suisse, owners of this sort of debt would only experience losses once shareholders were completely wiped out.
