LONDON, March 21 Reuters Distressed debt investors and large hedge funds are buying up Credit Suisse additional tier1 bonds at rockbottom prices after they were written down to zero in the Swiss bank39;s rescue by crosstown rival UBS.

Under the UBS deal, the Swiss regulator determined that Credit Suisse39;s AT1 bonds with a notional value of 16 billion Swiss francs 17.35 billion would be wiped out, a decision that stunned global credit markets and angered many holders of the debt, who believed they would be better protected than shareholders.

AT1 bonds, which can convert to equity, rank higher than shares in the capital structure of a bank. If a bank runs into trouble, bondholders will usually come before shareholders in terms of getting their money back.

AT1 bonds issued by other European banks tumbled on Monday as the treatment of Credit Suisse AT1 bondholders highlighted the risks of this type of debt.

The bonds, now trading at about 0.03 cents on the dollar, have become an opportunity for hedge funds, which are taking punts that the merger of UBSCredit Suisse might not proceed or that the Swiss regulator might even reverse its decision, six traders and dealmakers said.

Robert Southey, a broker at Southey Capital in London, said bonds worth several hundred millions dollars in face value had traded since Sunday afternoon, mainly between large U.S. investors, referring to the nominal value of the bonds.

As the bonds are publicly traded, opportunistic buyers can…