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Derivatives that track the value of riskier bank debt the sort that is being wiped out in the <keyword id="48085" type="General" weightage="100" keywordseo="credit-suisse" source="Orion">Credit Suisse</keyword> takeover are falling sharply now, according to a media report. Invesco's AT1 Capital Bond exchange-traded fund, which tracks the value of AT1 debt issued by banks, is down 15 per cent, The Guardian reported. These AT1 bonds, known as "contingent convertible" debt or CoCos, are designed to be triggered at times of market turbulence. They are basically shock absorbers to activate in a crisis if a bank's capital levels fall below a certain point in a crisis, AT1s are converted into equity, or written off. Investors are startled that Credit Suisse's AT1 bonds are being written off, even though the bank's equity is not totally destroyed (shareholders are taking a 60 per cent haircut). Typically, AT1 bonds are meant to be above equity in the debt hierarchy, The Guardian reported. <keyword id="3488241" type="General" weightage="80" keywordseo="neil-wilson" source="Orion">Neil Wilson</keyword>, the chief markets analyst at Markets.com, said this 'blatant' upending of the debt hierarchy will have ramifications, The Guardian reported. "These are 'contingent convertible' bonds that are riskier than other debt instruments and designed to get wiped out in a crisis  or converted to equity. "However, shareholders in CS are getting something, even if it's not much. Blatantly upending the hierarchy of debt will have ramifications and I think this is why we are seeing such a negative reaction in bank shares this morning," <keyword id="166282" type="General" weightage="80" keywordseo="wilson" source="Orion">Wilson</keyword> said. Charles-Henry <keyword id="16860108" type="General" weightage="80" keywordseo="monchau" source="Orion">Monchau</keyword>, chief investment officer at Syz Bank, fears there will be 'spillover' damage to global credit markets, The Guardian reported. Monchau said, "According to the Swiss bail-in regime, AT1 debt is above equity in the loss absorption waterfall. This is an arresting development, given that even unsecured bondholders usually rank above equity holders in the capital structure. So for equity holders to get 'something' and CoCo bondholders to get 'nothing' raises serious questions about the real value of CoCo bonds." SEE ALSO: <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/stock-market/news/fear-of-financial-crisis-is-keeping-investors-away-from-stock-markets-say-experts/articleshow/98813720.cms">Fear of financial crisis is keeping investors away from stock markets say experts</a> <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/finance/news/gold-is-bankable-shines-more-than-some-western-banks-say-experts/articleshow/98813925.cms">Gold is bankable, shines more than some western banks say experts</a>

CoCo bonds fall sharply over Credit Suisse deal

<ul class="summary-list"><li>The benchmark S&amp;P 500 index of US large-cap shares closed at a new all-time high Friday.</li><li>But the Russell 2000 is technically still in a bear market.</li></ul>Blue-chip US stocks are <a href="https://markets.businessinsider.com/index/s&amp;p_500">trading at record levels</a> – but small caps are still feeling the pain.While the <a href="https://markets.businessinsider.com/index/s&amp;p_500">S&amp;P 500</a> closed at a new high for the first time in two years Friday, the <a href="https://markets.businessinsider.com/index/russell_2000">Russell 2000</a> index, which tracks the share price of 1,966 companies with lower market capitalizations, is still trading 22% below its November 2021 peak, according to data from Refinitiv.That means the widely-followed gauge is technically still in a bear market, with high interest rates hammering lower-market-cap stocks even as AI powers <a href="https://markets.businessinsider.com/news/stocks/stock-market-outlook-magnificent-seven-big-tech-apple-microsoft-nvidia-2024-1">the "Magnificent Seven"</a> Big Tech titans to massive gains.<h2>Small-cap struggles</h2>Between March 2022 and July 2023, the Federal Reserve jacked up interest rates from near-zero to around 5.5% in a bid to clamp down on inflation, which has since started to cool toward the central bank's 2% target.As a result of that tightening campaign, <a href="https://www.businessinsider.com/recession-outlook-bank-credit-contracts-federal-reserve-interest-rates-economy-2024-1">businesses are borrowing less</a> – because it's tougher for them to repay loans at higher interest rates. That makes it harder for them to press ahead with spending projects and could chip away at their future cash flows.Read more: <a href="https://www.businessinsider.com/recession-outlook-bank-credit-contracts-federal-reserve-interest-rates-economy-2024-1">Bank credit is shrinking for the first time since the Great Recession - and that's a red flag for the economy</a>Russell 2000 companies tend to be particularly reliant on debt, so it's no surprise that they've felt most of the pain from the Fed's war on soaring prices."The small-cap part of the market is where companies are most exposed to rising rates because they tend to hold lots of debt," Ronald Temple, CIO at the asset management firm Lazard, told Business Insider in a <a href="https://markets.businessinsider.com/news/stocks/stock-market-outlook-donald-trump-joe-biden-ukraine-war-lazard-2023-11">recent interview</a>. "40% of Russell 2000 companies lose money, so these are companies that rely on credit to stay afloat."It's no surprise that the Fed's rate hikes "have had a big impact," he added.<h2>Soaring S&amp;P 500</h2>Blue-chip stocks also felt the pain from higher rates in 2022, with the S&amp;P 500 logging its worst year since the 2008 financial crisis and big names like <a href="https://markets.businessinsider.com/stocks/tsla-stock">Tesla</a> and Facebook parent <a href="https://markets.businessinsider.com/stocks/meta-stock">Meta Platforms</a> shedding hundreds of billions of dollars worth of market cap.But last year, the benchmark index rebounded, powered higher by the artificial intelligence investing craze, which sent investors piling into the so-called <a href="https://markets.businessinsider.com/news/stocks/tech-stocks-tesla-nvidia-apple-microsoft-amazon-the-magnificent-seven-2023-6">Magnificent Seven</a> stocks. On Friday, the gauge closed at a record of just under 4,840 points.Russell 2000-listed companies tend to be a far cry from those Big Tech behemoths – and it's difficult to imagine them ramping up capital expenditure to benefit from the rise in AI the same way stocks like <a href="https://markets.businessinsider.com/stocks/msft-stock">Microsoft</a> and <a href="https://markets.businessinsider.com/stocks/nvda-stock">Nvidia</a> have. That's widened the gap between the two indices to a level never seen before.This is "a tale of two markets," Charles-Henry Monchau, CIO at the Swiss private bank Syz Group, said Sunday in a <a href="https://www.linkedin.com/feed/update/urn:li:activity:7154872780537143298/" target="_blank" rel="noopener">post on LinkedIn</a>."The S&amp;P 500 closed at an all-time high. But the Russell 2000 is still in a bear market," he added. "That's never happened before."<h2>Economic bellwether</h2>The Russell 2000 isn't just a gauge of smaller-cap stock prices – it's also an economic bellwether. Its slump could be a sign that growth about to slow, after the US defied forecasters' gloomy predictions to dodge a long-heralded recession last year.Some Wall Street gurus believe the Fed will manage to engineer a so-called "soft landing," which refers to the dreamlike scenario where it brings inflation down to 2% without triggering a spike in unemployment or a severe recession.But others believe the economy is yet to feel the full brunt of higher borrowing costs.JPMorgan Chase CEO <a href="https://markets.businessinsider.com/news/currencies/jamie-dimon-jpmorgan-bitcoin-crypto-recession-inflation-fed-rate-cuts-2024-1">Jamie Dimon</a> said earlier this month he's still "a little skeptical of the <a href="https://www.businessinsider.com/personal-finance/goldilocks-economy">Goldilocks scenario</a>" – referring to an economy where the levels of growth, inflation, and unemployment look "just right."Top economists like Steve Hanke and David Rosenberg have also flagged the possibility that the US suffers a severe slump in growth. Hanke said last week that he believes a recession will soon "<a href="https://markets.businessinsider.com/news/stocks/steve-hanke-stocks-economy-outlook-recession-inflation-forecast-fed-money-2024-1">start to bite</a>", while Rosenberg warned in August that it'd take a "<a href="https://www.businessinsider.com/recession-forecast-economy-crash-markets-rosenberg-research-fed-jobs-labor-2023-9">miracle</a>" to avoid a downturn.

The S&P 500 just hit an all-time high – but many other US stocks are still in a bear market

<ul class="summary-list"><li><keyword id="11908246" type="UNKNOWN" weightage="60" keywordseo="bill-ackman" source="Orion">Bill Ackman</keyword>'s $4 billion blank-check company has just 6 weeks to identify a target to merge with.</li><li>A deal for <keyword id="11908247" type="UNKNOWN" weightage="60" keywordseo="pershing-square-tontine-holdings" source="Orion">Pershing Square Tontine Holdings</keyword> to acquire Universal Music collapsed last year.</li></ul>Billionaire investor Bill Ackman is running out of time to find a target for his $4 billion special purpose acquisition company.<a href="https://markets.businessinsider.com/stocks/psth-stock">Pershing Square Tontine Holdings</a> needs to identify a company to acquire within the next six weeks, or Ackman will have to return all its cash to his investors.A SPAC raises money by listing on the stock market and then aims to merge with a private company within a set timeframe. Ackman's blank-check vehicle <a href="https://www.marketwatch.com/story/bill-ackmans-pershing-square-tontine-goes-public-55-above-its-ipo-price-2020-07-22">went public</a> on July 22, 2020. Sponsors have to dissolve their SPAC within two years of listing if they are unable to identify an acquisition target.Ackman <a href="https://markets.businessinsider.com/news/stocks/bill-ackman-pershing-square-psth-spac-universal-music-stake-sec-2021-7?utm_medium=ingest&amp;utm_source=markets">scrapped his plan to buy a stake in Universal Music</a> last year, citing opposition to the deal from the Securities and Exchange Commission. PSTH is yet to identify a replacement target and its stock has plummeted to 5.7% below its initial $21.10 listing price since that deal was nixed.<a href="https://www.bloomberg.com/news/articles/2022-04-11/ackman-says-proposed-spac-rules-suggest-sec-backs-him-in-dispute#xj4y7vzkg">Ackman has subsequently urged the SEC to extend its deadline</a>, but it's looking increasingly likely that he'll have to return $4 billion worth of cash to PSTH's initial investors."Unless Ackman comes up with some magic in an extremely volatile and uncertain market, he will be returning the $4 billion," Jim Osman, founder of the Edge Consulting Group, told Insider.<keyword id="11930353" type="UNKNOWN" weightage="60" keywordseo="spacs" source="Orion">SPACs</keyword> raised $96 billion in the first quarter of 2021 alone, according to the <a href="https://hbr.org/2021/07/spacs-what-you-need-to-know">Harvard Business Review</a>, but the industry has struggled since that initial boom. Morgan Creek's <a href="https://markets.businessinsider.com/etfs/morgan-creek-exos-spac-originated-etf-us53656f4660?utm_medium=ingest&amp;utm_source=markets">Exos SPAC Originated ETF</a>, which tracks these vehicles, has plummeted 47.8% over the past year.One issue is that SPACs tend to merge with high-growth, low cash-flow companies that want to avoid the traditional IPO process. These sorts of stocks have struggled in 2022 due to rising interest rates, with the tech-heavy <a href="https://markets.businessinsider.com/index/nasdaq_100">Nasdaq 100</a> entering bear market territory."With monetary policies tightening, <a href="https://www.businessinsider.com/federal-reserve-inflaton-everything-bubble-economy-stock-market-debt-2022-1?r=US&amp;IR=T">speculative bubbles are bursting one after the other</a>," Charles-Henry Monchau, chief investment officer at Syz Bank, said. "SPACs are no exception.""Bill and Pershing face an uphill battle," Edge Consulting's Osman added. "Selling SPACs to investors is now virtually impossible."Read more: <a href="https://www.businessinsider.com/bill-ackman-netflix-stock-picks-to-buy-investing-analysis-strategy-2022-2?r=US&amp;IR=T">Bill Ackman owns 7 stocks after his $1.1 billion bet on Netflix. Here's why he bought each of them.</a>

Bill Ackman's SPAC has just 6 weeks to find a target — or he'll have to return $4 billion to investors

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CoCo bonds fall sharply over Credit Suisse deal

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The S&P 500 just hit an all-time high – but many other US stocks are still in a bear market

George Glover

Bill Ackman's SPAC has just 6 weeks to find a target — or he'll have to return $4 billion to investors

George Glover

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