In the wake of the shock caused by the Swiss Financial Market Supervisory Authority's (Finma) decision to write off Credit Suisse's (CS) Additional Tier-1 bonds (AT1) worth 16 billion francs—a move that triggered a wave of lawsuits still awaiting judicial resolution—the market for subordinated bonds in general, including AT1 (or contingent convertible, «Coco») bonds from banks, other subordinated bonds, and corporate hybrids, has performed «excellently.»

This is the conclusion reached by Paul Gurzal, Co-Head of Fixed Income, and Jérémie Boudinet, Head of Financial and Subordinated Debt, at Crédit Mutuel Asset Management (CMAM), in a study published a few weeks ago.

Double-Digit Returns with AT1 Bonds

CMAM is a subsidiary of Groupe La Française, the asset management company of Crédit Mutuel Alliance Fédérale, a federation of French cooperative banks that also owns the Basel-based Bank CIC.

Last year, euro-denominated AT1 or Coco bonds achieved returns of 13,6 percent, outperforming their dollar-denominated counterparts (in contrast to the equity market, where U.S. stocks are leading). According to the study, the underperformance of dollar bonds is attributed to diverging interest rate trends in the eurozone and the U.S.

Record Issuance Volume for the Financial Crisis Instrument

In 2024, AT1 bonds reached a record issuance volume, driven by significant refinancing needs due to many maturities, especially in the first half of 2025. While AT1 bonds technically have perpetual maturities, issuers (with regulatory approval) can redeem them early at specific call dates.

The instrument was developed after the global financial crisis of 2008/2009 in close collaboration with authorities, coordinated by the Basel Committee on Banking Supervision at the Bank for International Settlements. It allows systemically important banks to raise large amounts of funds at relatively low cost during normal times (cheaper than issuing new equity). When all is well, Coco bonds remain debt instruments. However, in a crisis, they can be converted into equity (i.e., shares) or, as in the case of CS’s collapse, written down to absorb losses, provided the conditions in the prospectus are met.

Business as Usual Despite Australia's Exit

CMAM does not expect significant changes in AT1 regulation in 2025 and considers it unlikely that other countries will follow Australia's radical example of phasing out the instrument.

Euro-denominated corporate hybrid bonds also performed well in 2024, achieving returns of 7,5 percent, nearly matching subordinated insurance bonds (7,6 percent). The asset class benefited from falling interest rates and the significant narrowing of credit spreads, driven by yield-hungry bond investors.

However, Gurzal and Boudinet note a growing complexity in the structuring of these already sophisticated corporate hybrids. Additionally, Moody's has revised its rating methodology, allowing, under certain conditions, hybrids to receive a rating only one notch below the company's standard bonds.

Banks and Insurers: Mergers and Acquisitions Back in Vogue

CMAM identifies the resurgence of merger and acquisition (M&A) activity, motivated by the pursuit of size and market share, as the most important trend in the financial sector. In banking, names like Unicredit, Commerzbank, Banco BPM, BBVA, and Banco Sabadell stand out.

Even the usually less headline-grabbing insurance sector is seeing movement. «It is expected that BNP Paribas Cardif will merge with AXA IM’s asset management business, and Aviva will acquire Direct Line in the UK. This consolidation trend is likely to continue in 2025, possibly leading to an agreement between Generali and Natixis regarding their asset management activities»—an agreement reportedly signed this Tuesday, according to finews.com.

Hybrid Bonds and Switzerland: A Rocky Relationship

The analysis does not cover hybrid bonds denominated in francs. While the international AT1 market has recovered surprisingly quickly after the CS shock, the Swiss market appears to be taking longer to reopen. For instance, in May 2024, St. Galler Kantonalbank issued a subordinated Tier-2 bond to refinance a redeemed AT1 bond. UBS also issued subordinated franc bonds in 2024 but no AT1 instruments.

Corporate hybrids represent a particularly somber chapter in Switzerland. They last garnered attention in the case of Hochdorf, whose holding company is under debt restructuring. The bond issued by the former dairy processor (whose operational business was sold off) is the first corporate hybrid in Switzerland to enter liquidation proceedings. The Swiss market for corporate hybrid bonds is an increasingly narrow niche.

Convertible Bonds: Heading Toward «Protected Species» Status?
Finally, the topic of hybrid instruments naturally brings to mind the classic convertible bond. In Switzerland, this is also a tight niche market, which may soon need «protected species» status. It most recently drew attention due to another «accident»: Pharmaceutical company Idorsia convened a bondholder meeting to postpone repayment of a convertible bond that matured last week.

The fact that the international convertible bond market is still recovering provides only little comfort.