Why markets are in an uproar about a risky bank bond known as the AT1

A decision has been made to write down $17.5bn of Credit Suisse AT1 bonds to zero, and therefore those bondholders will not receive anything from the rescue merger

London — Financial markets have been thrown a fresh curve ball by the decision to write down Sf16bn of Credit Suisse bonds, known as additional tier 1 or AT1 debt, to zero, as part of a forced rescue merger with UBS.

They make up part of the capital cushion that regulators require banks to hold to provide support in times of market turmoil.If AT1s are converted into equity, this supports a bank’s balance sheet and helps it to stay afloat. They also pave the way for a “bail-in”, or a way for banks to transfer risks to investors and away from taxpayers if they get into trouble.AT1s rank higher than shares in the capital structure of a bank.

Separately, the Bank of England also said that Britain had a clear statutory order in which shareholders and creditors of failed banks bear losses, with AT1 instruments ranking ahead of other equity instruments and behind tier two bonds in the hierarchy. One bank adviser and a bond investor said the Swiss government’s actions were legal since the type of AT1 bonds issued by Credit Suisse could be subject to a complete writedown.

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