Published - May 11th, 2023 @ 12:45 PM (CET)

‍

The illiquid sector of swaps insuring Credit Suisse Group's debt has experienced a significant resurgence as hedge funds identify potential triggers that could activate the swaps. Prominent investment firms such as FourSixThree Capital and Diameter Capital Partners have initiated the acquisition of swaps designed to provide insurance coverage for Credit Suisse's subordinated bonds.Their argument is centered around the controversial write-down of the firm's AT1 securities, which they believe qualifies as a trigger event. In support of their case, the hedge funds have sought assistance from the law firm Kramer Levin. This development has led to a remarkable increase in the swaps this week, reaching its highest level since UBS Group's emergency acquisition of Credit Suisse in March.

‍

Recent Surge in Swaps
‍

As part of the acquisition, Swiss regulators compelled the write-off of approximately US$17 billion worth of Additional Tier 1 (AT1) notes. This move has prompted an 85 basis point surge in the swaps this week, according to CMAI data, with the exchanges currently standing at 360 basis points. The significant increase in trading activity reflects the hedge funds' belief that the write-down qualifies as a triggering event.

‍

Exploring Potential Triggers
‍

Typically, market participants who suspect a breach of bond terms would submit a query to the Credit Derivatives Determinations Committee to activate an insurance payout. However, as of Wednesday evening in New York, the committee's website did not indicate such submissions. Nevertheless, JPMorgan Chase & Co traders have engaged in discussions with their buy-side clients regarding the possibility of a trigger. It's important to note that the bank is presenting this argument as one being made by certain hedge funds rather than expressing its own perspective.

‍

Legal Challenges and Regulator Justification
‍

Multiple investors holding AT1 bonds have independently launched legal challenges against the decision to write down the bonds. These legal challenges add an additional layer of complexity to the situation, as they influence the outcome of the triggering event and subsequent insurance payouts. Regulators, on the other hand, have defended the write-down, citing the involvement of state support in the rescue deal as justification.

‍

Conclusion
‍

The recent surge in Credit Suisse's credit default swaps (CDS) has garnered attention as hedge funds identify potential triggers based on the controversial write-down of the firm's AT1 securities. With swaps reaching their highest level since the UBS Group acquisition, the financial community eagerly awaits developments in this ongoing situation. The involvement of JPMorgan Chase & Co traders and legal challenges from investors further intensify the discussion surrounding the triggering event. As the story unfolds, market participants and investors will closely monitor the resolution of these issues and their impact on Credit Suisse's financial standing.

‍

‍

The information on mexem.com is for general informational purposes only. It should not be regarded as investment advice. Investing in stocks involves risk. A stock's past performance is not a reliable indicator of its future performance. Always consult a financial advisor or trusted sources before making any investment decisions.

‍

‍

‍