One of America’s biggest investment managers lost $340 million in the surprise Credit Suisse bond write-off

Emmanuel Roman, CEO at PIMCO
PIMCO may have lost millions in AT1 bonds -but there is a silver lining.
Lauren Justice—Bloomberg/Getty Images

In the pecking order of who gets paid first when a bank collapses, shareholders don’t usually sit very high up the chain.

But in an unusual turn of events, those who held shares in Credit Suisse have actually got a payout—in the billions—ahead of those who held bonds in the bank.

That has meant an economic hit to Pacific Investment Management Co (PIMCO)—one of America’s largest investment managers. PIMCO lost $340 million when a category of bonds were wiped out on Sunday in UBS’s takeover of the bank, sources told Reuters.

The bonds were wiped out on Sunday, with PIMCO’s total loss estimate based on the trading value the bonds had before the weekend.

California-based PIMCO lost out on a specific type of bond, an Additional Tier 1 (AT1) bond. Swiss regulators made the decision on Sunday to wipe out $17 billion-worth of AT1 debt in order to allow the Credit Suisse and UBS merger to go through.

Usually, bondholders rank above shareholders when a bank goes bust. However, under the bond stipulations in Switzerland, financial watchdogs are under no pressure to stick to the normal capital structure.

As a result, shareholders, who would usually be among the biggest losers, will at least see some return from UBS’s takeover price of 0.76 Swiss francs ($0.8191) per share—the equivalent of $3.23 billion, a far cry from the $8 billion the bank was worth Friday, but more than the $0 they might have received otherwise.

Surprise and legal action

Companies like PIMCO who purchased the risky bank bonds shouldn’t have been surprised by the move, according to one bank adviser and bond investor who told Reuters that the Swiss authorities’ action is completely legal given the fine print on Credit Suisse’s AT1 bonds. This stipulated that the bonds could be subject to a complete write down.

Unsurprisingly, the revelation has prompted AT1 bondholders in other banks to spook, with the price of bonds dropping as investors try to evaluate the level of risk. One bond trader told that the regulators’ move at Credit Suisse had set a precedent that means the bonds are now more exposed to wider economic factors, adding: “And economic risks are really hard to understand and price.”

PIMCO’s total exposure in the Credit Suisse collapse now stands at around $4 billion, the source added.

The investment manager—which manages about $1.74 trillion in assets—isn’t alone. According to Morningstar data seen by Reuters, Paris-based Lazard Freres Gestion had 7.4% of a €1.45 billion fund in AT1 bonds, worth around $107.3 million.

Likewise Reuters said asset manager GAM had 4.81% of its €1.15 billion fund in AT1 bonds.

A number of bondholders—who have not been named—are now reportedly considering legal action, according to law firm Quinn Emanuel Urquhart & Sullivan.

PIMCO can’t be too down-hearted about their losses however, as the source added that the asset write-off had been more than covered by gains in PIMCO’s other Credit Suisse bond holdings following the UBS takeover.

PIMCO declined to comment when approached by Fortune.

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