Disaster bonds
“The Swiss Financial Market Supervisory Authority’s decision to write off the entire value of Credit Suisse’s Tier 1 bonds should not affect the catastrophe bonds,” Marcos Alvarez, head of global insurance at DBRS Morning Star, told Bloomberg News. And I think that catastrophe bonds are not going to be activated or repaid in the near term.”
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A Credit Suisse spokesman declined to comment on the matter.
Catastrophe bonds are used more often for insurance against hurricanes and other natural disasters than for banking risks. Credit Suisse bonds will be triggered in the event of principal being wiped out if certain events involving operational risks occur as described in their issuance documents. The bonds have not yet been activated or reduced, according to a person with knowledge of the matter, who declined to be identified because details are not public.
The Swiss bank sold this denomination of banknotes for the first time in 2016 as a way to reduce the capital required to be held in reserve against operational risks. Zurich Insurance Group provided the underlying insurance contract, part of which was securitized into catastrophe bonds issued by an entity in Bermuda. The Zurich company declined to comment on the matter, arguing that it affected the customer’s privacy.
Credit Suisse presented the bonds to investors through its prospectus as a win-win for both the bank and the bondholders, as the bank benefited from the decline in its risk-weighted assets, while the investors reaped the returns.
Yet, after scandals emerged stemming from the 2021 collapses of the specialist finance firm Grinsel and hedge fund Archegos Capital Management – both of which cost Credit Suisse billions of dollars – the catastrophe bonds traded well below their face value.
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