A perpetual instrument paid like a bond but written down or converted ahead of shares, funding regulatory capital without diluting shareholders.
Loss-absorbing subordinated debt is a perpetual instrument with no redemption date, whose coupon may be canceled at the issuer's discretion and whose principal is written down or converted into shares once a regulatory trigger is breached. Its appeal to the issuer is twofold: it counts toward the highest tiers of regulatory capital while remaining debt for tax purposes in many jurisdictions, and issuing it does not dilute shareholders immediately. For the investor it is an instrument whose yield pays for a poorly understood risk, because the subordination runs deeper than the word debt suggests. Two features regularly catch the market out: coupon cancellation is not a default and triggers no contractual remedy, and the loss absorption order may, depending on the governing texts, place these instruments behind shares that were assumed to be riskier. For an insurer they are one link in the financing of the capital requirement, and their refinancing cost reacts to credit spreads far more violently than senior debt.
On 19 March 2023, as part of the UBS takeover of Credit Suisse, the Swiss supervisor ordered the complete write-down of roughly sixteen billion Swiss francs of additional tier 1 capital instruments, while shareholders received UBS shares.
restricted tier 1, RT1, AT1, titre subordonné à absorption de pertes, dette perpétuelle