The importance of contractual terms on Additional Tier 1 bond performance

Abstract

The collapse of Credit Suisse in mid-March 2023 resulted in an unprecedented event where Additional Tier 1 (AT1) bondholders experienced complete write-downs before any shareholder equity, prompting international regulatory concerns and investor reactions. This paper employs an event study and the synthetic control method to measure the influence of contractual features on post-crisis AT1 bond performance using historical data and term sheets. Our findings show that the loss absorption mechanism, along with the presence of the features ”write-up clause” and ”coupon frequency,” significantly impacted their performance in the aftermath of the Credit Suisse collapse.