Japan’s SMFG resumes AT1 bond sales in first big issuance since Credit Suisse wipeout

Japan’s Sumitomo Mitsui Financial Group on Wednesday sold ¥140bn ($1bn) in additional tier 1 bonds, marking the first major issuance of the debt since the turmoil caused by the $17bn wipeout of Credit Suisse bonds.

Global banks had placed new offerings of the bonds, also known as contingent convertibles or AT1s, on hold after Swiss regulators shocked investors by writing the value of Credit Suisse AT1 debt down to zero as part of its takeover by rival UBS in March.

Since then, there has been a gradual improvement in investor sentiment, after regulators elsewhere clarified that the Swiss decision to leave AT1 holders with nothing would not set a precedent for the $260bn market.

SMFG said in a regulatory filing that ¥89bn of the AT1 bonds, which cannot be called for five years and two months, would carry a coupon rate of 1.879 per cent, while ¥51bn of non-callable 10-year two-month debt would yield 2.180 per cent.

Both tranches were priced at a spread of 171 basis points. SMFG previously sold ¥107bn of AT1 bonds in December in two tranches at a spread between 138 and 148.3 basis points.

Sumitomo Mitsui, one of the three banks responsible for the lion’s share of AT1 issuance, had already been sounding out investor appetite when the crisis at Credit Suisse erupted. The bank said it decided to go ahead with the issuance after it confirmed a certain level of investor demand.

Mitsubishi UFJ Financial Group, however, delayed a new AT1 bond sale, planned for this month, until mid-May at the earliest.

The exposure of Japanese financial institutions to the Credit Suisse bond wipeout has been limited, but the largest hit has been Mitsubishi UFJ Morgan Stanley Securities, the group’s core securities arm, which sold about ¥95bn of the Swiss lender’s AT1s to domestic retail and corporate clients.

AT1s are a class of risky bank debt that can be converted into equity or wiped out entirely if capital levels fall below a certain level. They were introduced in the wake of the global financial crisis to ensure bondholders would absorb some of the losses in the event of bank failures in order to shield depositors and avoid taxpayer-funded bailouts.

But Swiss regulators upended the normal hierarchy by wiping out AT1 bondholders despite giving shareholders $3.25bn in the UBS deal. According to Swiss financial regulator Finma, this was allowed because the AT1s in question contained explicit contractual language that they would be “completely written down in a ‘viability event’ in particular if extraordinary government support is granted”.

At a news conference this month, Masahiko Kato, the chief executive of Mizuho Bank who had taken over as the new head of the Japanese Bankers Association, stressed that AT1s issued by Japanese lenders generally do not have a similar clause, describing the wipeout of Credit Suisse bonds as “a special case”.