Analysts at Fitch Ratings have assured EU and UK insurers that Credit Suisse’s Additional Tier 1 (AT1) notes full write down by Swiss authorities – without imposing full losses on the bank’s equity – does not imply that the countries’ authorities will treat their Restricted Tier 1 (RT1) instruments the same way.
“Credit Suisse’s AT1 notes were fully written down on the granting of extraordinary liquidity backed by the Swiss government to avert a crisis amid a rapid surge in deposit outflows,” said analysts. “The Swiss Financial Market Supervisory Authority viewed this as a ‘viability event’ as set out in the notes’ terms, which triggered the write-down.
“In contrast, RT1 investors should not face write-downs due to liquidity considerations alone or due to interventions from the authorities whose timing and nature may be hard to foresee in a rapidly evolving crisis.”
According to Fitch, RT1 write-down conditions are more narrowly defined than those of Credit Suisse’s AT1 notes. They would typically only be triggered by an insurer’s regulatory capital metrics falling below specified levels, and not by liquidity considerations alone, analysts explained.
“As EU and UK insurers’ assets and liabilities are broadly matched by nature and duration due to Solvency II requirements, a decline in capital to below trigger levels would typically occur much less rapidly than a run on a bank, even in a financial market shock,” the agency noted.
Adding: “Insurers are also much less prone than banks to surges in outflows that could stress their liquidity or capital.”
Furthermore, RT1 investors have priority over equity holders, and the EU and UK authorities have restated their commitment to adhere to the conventional creditor hierarchy for claims in bank liquidation, imposing losses first and fully on equity before then moving to subordinated creditors.
Also, RT1 instruments often have equity conversion features. Conversion terms vary between instruments but conversion should leave investors no worse-placed than existing equity holders.
Additionally, they feature fully discretionary coupons, which Fitch expects would be cancelled in a stress scenario. Fitch’s RT1 ratings incorporate a two-notch deduction to reflect this, the agency noted, adding that coupon cancellation is treated as non-performance.
“Fitch-rated EU and UK insurers have minimal exposure to Credit Suisse’s AT1 notes relative to their capital and earnings. This is partly due to the high Solvency II capital charges that apply to sub investment-grade debt,” analysts concluded.
