The Funds Caught Out by Credit Suisse's Doomed Bonds

AT1 debt is not for the faint of heart, as these funds are now discovering

Robert van den Oever 22 March, 2023 | 9:01AM
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Credit Suisse

It should not have been a total surprise, but the fact that UBS’s Credit Suisse rescue deal included a write-off of CHF 16 billion in Additional Tier-1 (AT1) capital to zero has shaken the markets.

That writedown has significant impact on bond markets as many European bond funds have exposure to this type of subordinated debt. It is a very risky type of debt, designed to be last in line when failure happens. And this case shows it is in line even behind shareholders.

Morningstar data reveals which funds have exposure to Credit Suisse’s AT1 debt. These are the funds with a Morningstar Analyst Rating with the largest exposure to Credit Suisse AT1:

The most affected-funds are the ones that took positions in riskier assets. GAM’s Star Credit Opportunities funds stands out here. It has a total exposure of 4.81% to Credit Suisse’s AT1 debt, and its approach is not for the faint of heart. Morningstar fund analyst Mara Dobrescu describes it as "a niche offering only suitable for patient investors".

"The approach entails sharp drawdowns that can be difficult for some investors to stomach," she adds. The managers aim for bonds in mostly financial companies and "will happily dip lower into the capital structure of banks they consider exceptionally strong". AT1 securities made up to 35% of assets as of October 2022, already above the 25% the managers used to stick to. That now works against the fund quite significantly.

The other fund standing out is Nordea 1 – European High Yield Bond. This is a high-yield fund with a broad portfolio featuring various sectors. However, one of the biggest individual bets was Credit Suisse, with 2% exposure by September 2022.

It’s important to note that portfolio dates are the latest available, and differ by fund. The GAM Star fund portfolio date is end of November 2022, so actual holdings may have changed since. Nordea, on the other hand, has end of January 2023 as its portfolio date. Some funds also have small exposures to Credit Suisse but aren’t specifically designed to seek out risk.


Looking further into non-medallist funds, exposure to Credit Suisse is clearly higher. That is due to the specific approach of companies like Lazard, which is looking for subordinated debt. The same goes for the Assenagon fund, which invests specifically in subordinated debt and contingent convertible capital instruments (CoCos). The AB Financial fund, meanwhile, is dedicated to debt from financial companies, hence its 6% exposure to Credit Suisse.

The two AHAM bond funds with a surprisingly high exposure are dedicated vehicles in emerging markets, so are not totally representative here.


ETF Exposure to Credit Suisse

In the exchange-traded fund (ETF) segment, exposures are limited, so the top ETFs in this list are Invesco and Wisdom Tree, both of which are dedicated to debt in the financial sector, which makes them vulnerable to situations like this.


Active ETFs

The active ETFs have a Purpose fund at the top of the list, which invests in financial companies with strong fundamentals at attractive relative valuations. In searching for higher yields, the managers have taken more risk.

An earlier version of this article incorrectly included AT2 bond positions of some funds. In the corrected tables, the following changes were made (as a consequence, the ranking of some funds has changed):

• In table 1 the funds PIMCO GIS GlInGd Crdt Instl USD Inc and BlueBay Investment Grade Bd B EUR were removed, and the funds Invesco Corporate Bond A US Fund Corporate Bond and FTGF WA Glb Mlt Strat A USD Dis (D) were added;

• In table 2 the funds New Capital Wlthy Ntns FMB 2023USDInsAcc and Altana Corporate Bond A Inst EUR Acc were removed and the funds GAM Star Interest Trend Non UK RFS $ Acc and Lazard Credit Fi SRI PVC EUR were added;

• In table 3 the funds PIMCO LowDur US CorpBd Source ETF ETF $ and PIMCO Euro Low Dur Corp Bd ETF Inc were removed, and the funds Fidelity Global Core Plus Bond ETF and Western Asset Short Duration Inc ETF were added;

• In table 4 the funds PIMCO LowDur US CorpBd Source ETF ETF $ and PIMCO Euro Low Dur Corp Bd ETF Inc were removed, and the funds Fidelity Global Investment Grade Bd ETF and Mackenzie Global Hi Yld Fxd Inc ETF added.

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Robert van den Oever  is Research Editor of Morningstar Benelux

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