Industry Updates

Credit Suisse AT1 investors sue Swiss regulator after $17bn CoCo bond wipe-out

‘Finma’s decision undermines international confidence in the legal certainty and reliability of the Swiss financial centre’

Jamie Gordon

Credit Suisse 3

Investors representing a third of $17bn Credit Suisse additional tier one (AT1) issuance have filed lawsuits against Swiss regulator Finma after their bonds were written down to zero as part of the bank’s acquisition by UBS.

The latest group to enter legal proceedings were 90 institutional investors and 700 family offices representing $1.7bn of bonds, with law firm Pallas announcing it had filed a suit against Finma on 18 April on behalf of the investors.

Natasha Harrison, partner at Pallas, commented: “We are working with a significant number of AT1 investors to execute a multi-jurisdictional litigation strategy to secure compensation and redress our clients. 

“The purported write-down of the AT1s was unlawful and our clients must be fully compensated.”

A separate bondholder group represented by law firm Quinn Emmanuel Urquhart & Sullivan filed a separate lawsuit against the Swiss regulator last month.

Thomas Werlen, managing partner of the firm, said: “Finma’s decision undermines international confidence in the legal certainty and reliability of the Swiss financial centre.” 

The legal challenges follow UBS’s decision to acquire Credit Suisse for $3.25bn on 19 March in a conditional deal including a $107.8bn liquidity loan from the Swiss National Bank, a CHF9bn guarantee from the Swiss government, a Material Adverse Change clause and the cancellation of $17bn of contingent convertible (CoCo) – or AT1 – bonds.

As markets opened on Monday the following day, the Invesco AT1 Capital Bond UCITS ETF (AT1) and WisdomTree AT1 Coco Bond UCITS ETF (COCB) collapsed 12.9% and 11.9%, respectively, in morning trading.  

Goldman Sachs previously described the write-down as the “largest loss ever inflicted to AT1 investors since the birth of the asset class”, with around $900bn issuance since 2012, with European banks making up 80%.

Charles-Henry Monchau, CIO at Syz Bank, said: “For equity holders to get ‘somtheing’ and CoCo bond holders to get ‘nothing’ raises serious questions about the real value of CoCo bonds.”

AT1s were initially created after the Global Financial Crisis (GFC) in 2008 as a form of junior debt that would convert into equity once the issuing bank fell below an agreed capital threshold. 

While the UBS acquisition of Credit Suisse breached the creditor hierarchy by paying equity holders before AT1 investors, Credit Suisse CoCo bond documentation states Finma “may not be required to follow any order of priority and AT! Notes “could be cancelled in whole or in part” before company equity.

The only other occasion where AT1s were cancelled was when Spain’s Banco Popular wrote down €1.37bn of bonds in 2017 but the bank’s equity was also wiped out. 

The Swiss federal prosecutor has now opened an investigation into the Credit Suisse acquisition.

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