Who ranks first?

Who ranks first?

Who ranks first? 768 512 Tamela

As many of you will know, Silicon Valley Bank (“SVB”), a financial institution specialising in providing banking and financial services to technology and innovation-based businesses, failed in March 2023.

This was as a result of a bank run in which a large number of depositors withdrew their funds from the bank in a short period of time, resulting in a liquidity crisis and the bank’s eventual failure. This was followed in quick succession by the failure of another American bank called Signature Bank.

It appears the sharp rise in interest rates induced by many Central Banks globally as a mechanism to deal with the high inflationary environment may have been a large contributor to the bank failures. Another factor worth mentioning is investor sentiment. This led to the “bank runs” which ultimately resulted in the banks folding.

Credit Suisse, a well-respected member of the astute Swiss Banking fraternity succumbed to the negative investor sentiment. Its major shareholder, Saudi National Bank, announced that it would not be injecting additional capital to support the bank, which triggered the events which culminated in a rescue package structured by the Swiss Fed whereby UBS, another Swiss behemoth, acquired all the equity in and injected additional liquidity into Credit Suisse.

Paramount to this rescue package, was the write down of c. $17bn of Credit Suisse’s AT1 debt, a hybrid instrument that combines features of both debt and equity designed to meet regulatory requirements for capital adequacy under Basel III guidelines. It appears this is where Finance 101 was completely turned upside down: Ordinary equity holders outranked AT1 debt holders in an unprecedented solution which may hurt Swiss Banking and Global Banking for years to come. Current holders of AT1 debt in other banking institutions are left asking what the actual risk of the paper they hold is, and whether they are being commensurately compensated for taking on such risk? In essence these debt instruments should arguably have better returns than ordinary equity if the outcome of the Credit Suisse rescue package is anything to go by. It appears the world is in a very strange and treacherous place, where well understood finance fundamentals may no longer hold.

How can we help?

Tamela has extensive experience and capabilities in capital markets, capital raising, project and corporate finance for various sectors and can assist with debt/equity restructuring. For more information, please contact Masonwabe Ndyosi on 081 787 7523 or Masonwabe@tamela.co.za

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