In the pecking order of who gets paid first when a bank collapses, shareholders dont usually sit very high up the chain.
But in an unusual turn of events, those who held shares in Credit Suisse have actually got a payoutin the billionsahead of those who held bonds in the bank.
That has meant an economic hit to Pacific Investment Management Co (PIMCO)one of Americas largest investment managers. PIMCO lost $340 million when a category of bonds were wiped out on Sunday in UBSs takeover of the bank, sources told Reuters.
The bonds were wiped out on Sunday, with PIMCOs total loss estimate based on the trading value the bonds had before the weekend.
California-based PIMCO lost out on a specific type of bond, an Additional Tier 1 (AT1) bond. Swiss regulators made the decision on Sunday to wipe out $17 billion-worth of AT1 debt in order to allow the Credit Suisse and UBS merger to go through.
Usually, bondholders rank above shareholders when a bank goes bust. However, under the bond stipulations in Switzerland, financial watchdogs are under no pressure to stick to the normal capital structure.
As a result, shareholders, who would usually be among the biggest losers, will at least see some return from UBSs takeover price of 0.76 Swiss francs ($0.8191) per sharethe equivalent of $3.23 billion, a far cry from the $8 billion the bank was worth Friday, but more than the $0 they might have received otherwise.
Surprise and legal action
Companies like PIMCO who purchased the risky bank bonds shouldnt have been surprised by the move, according to one bank adviser and bond investor who told Reuters that the Swiss authorities action is completely legal given the fine print on Credit Suisses AT1 bonds. This stipulated that the bonds could be subject to a complete write down.
Unsurprisingly, the revelation has prompted AT1 bondholders in other banks to spook, with the price of bonds dropping as investors try to evaluate the level of risk. One bond trader told Investing.com that the regulators move at Credit Suisse had set a precedent that means the bonds are now more exposed to wider economic factors, adding: And economic risks are really hard to understand and price.
PIMCOs total exposure in the Credit Suisse collapse now stands at around $4 billion, the source added.
The investment managerwhich manages about $1.74 trillion in assetsisnt alone. According to Morningstar data seen by Reuters, Paris-based Lazard Freres Gestion had 7.4% of a 1.45 billion fund in AT1 bonds, worth around $107.3 million.
Likewise Reuters said asset manager GAM had 4.81% of its 1.15 billion fund in AT1 bonds.
A number of bondholderswho have not been namedare now reportedly considering legal action, according to law firm Quinn Emanuel Urquhart & Sullivan.
PIMCO cant be too down-hearted about their losses however, as the source added that the asset write-off had been more than covered by gains in PIMCOs other Credit Suisse bond holdings following the UBS takeover.
PIMCO declined to comment when approached by Fortune.
