AT1 bonds which got written off worth CHF 16bn are bonds which got a total value of 0. Bondholders lost their total investment while Equity holders which technically are supposed to be repaid last, are being paid. This is the first of its kind as it changes the ranking of risky assets.
Every time there is a crisis a new Acronym comes into the limelight. In CS-UBS crisis its AT1. Additional Tier 1 Capital Bonds or Contingent Convertibe Bond (CoCos). CS wrote down the whole value of these bonds and it was decided by the Swiss National Bank and not UBS, according to UBS CEO. Some traders were buying these bonds hoping to get a better deal than the riskier stocks but to their shock, debt failed before equity.
CoCos or AT1s are high yield debt instruments which are designed to be the lowest ranking in the banking debt instruments. These instruments are designed to give attractive return when the bank is doing well but are the first ones to bear the pain when there is trouble in the banks. The written off debt will provide major support to UBS which will be getting a stronger balance sheet which it got with a lesser amount of debt. These were designed after the financial crisis to help prevent the bank from failing. These bonds are convertible and are set to prevent a government bailout to rescue a failed bank and acts as a buffer. These bonds do not have a maturity date set. These bonds can be written off incase the bank fails to maintain certain capital ratios which was the case in the merger according to the Swiss National Bank. These requirements are known as MREL.
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