The acquisition of Credit Suisse may have costly consequences for Canadian banks and insurance companies
In brokering the emergency takeover, Swiss regulators deemed roughly US$17-billion worth of Credit Suisse additional Tier 1 debt worthless, while positioning the bank’s shareholders to receive US$3.25-billion in UBS stock. The decisioncredit markets, as holders of common equity are usually the first to absorb losses because compensating lenders is considered a higher priority.
“For the Canadian market in particular, this will also impact limited resource capital notes [LRCNs] as pricing already was high. It might become more expensive for banks and insurers in Canada to issue LRCNs, at least for the next few months.” Canada’s six largest banks have issued more than $20-billion of those bonds over the past three years, according to data from iA Capital Markets – almost a fifth of all the debt they issued.
Mr. Pouliot expects between $2-billion and $4-billion worth of LRCNs to be issued this year, with investors likely to ask for higher interest payments in light of recent events. Should a Canadian bank fail, LRCN holders would receive “a more favourable economic outcome than existing common shareholders, who would be the first to suffer losses,” the Office of the Superintendent of Financial Institutions said this week.
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