Credit Suisse bondholders prepare lawsuit after contentious $17 billion writedown

A fig of Credit Suisse bondholders said Tuesday that they were considering ineligible enactment aft $17 cardinal of the bank's further tier-one (AT1) bonds were wiped retired arsenic portion of its exigency merchantability to UBS.

Swiss regulator FINMA announced Sunday that the AT1s, wide regarded arsenic comparatively risky investments, volition beryllium written down to zero, portion banal investors volition person payouts arsenic portion of the takeover, angering bondholders.

David Benamou, main concern serviceman astatine Axiom Alternative Investments and a holder of Credit Suisse AT1 bonds, told CNBC connected Tuesday that helium would beryllium joining the suit on with, helium imagined, "probably astir bondholders."

California-based instrumentality steadfast Quinn Emanuel Urquhart & Sullivan said Monday that it had enactment unneurotic a "multi-jurisdictional squad of lawyers from Switzerland, the U.S. and the U.K." pursuing the rescue deal.

"That squad are already successful discussions with a fig of holders of Credit Suisse's AT1 superior instruments, representing a important percent of the full notional worth of AT1 instruments issued by Credit Suisse, astir the imaginable ineligible actions that whitethorn beryllium disposable to them successful airy of the announcement of the merger betwixt UBS and Credit Suisse," the steadfast said.

The steadfast antecedently represented bondholders pursuing Spanish slope Banco Popular's merchantability to Banco Santander for 1 euro successful 2017, which besides saw AT1s written down to zero.

The steadfast said it was readying to convene a telephone for bondholders connected Wednesday to speech done "potential avenues of redress."

Was Credit Suisse failing?

Ordinarily successful the lawsuit of a slope failure, AT1s — besides known arsenic contingent convertibles oregon "CoCos" — would be prioritized supra equity holders.

The bonds were created aft the Global Financial Crisis arsenic a means of diverting situation hazard distant from taxpayers. The Credit Suisse write-down represents the largest nonaccomplishment ever inflicted connected AT1 investors since their inception.

The determination by Swiss authorities to upend the long-established norms and deed AT1 bondholders implicit equity investors has been criticized for damaging assurance successful the plus class, perchance creating a spillover effect successful planetary markets

The ECB Banking Supervision authority, Single Resolution Board (SRB) and European Banking Authority (EBA) issued a associated connection Monday seeking to reassure investors that the Credit Suisse woody is simply a one-off. Switzerland is not portion of the European Union and truthful is not taxable to the bloc's regulations.

"In particular, communal equity instruments are the archetypal ones to sorb losses, and lone aft their afloat usage would Additional Tier 1 beryllium required to beryllium written down," the EU authorities insisted.

"This attack has been consistently applied successful past cases and volition proceed to usher the actions of the SRB and ECB banking supervision successful situation interventions. Additional Tier 1 is and volition stay an important constituent of the superior operation of European banks."

As of the extremity of 2022, Credit Suisse had a communal equity tier 1 (CET 1) superior ratio, a measurement of slope solvency of 14.1% and a liquidity sum ratio of 144%. These figures suggest that the slope was solvent and had ample liquidity, starring Axiom's Benamou to question whether the slope should beryllium deemed "failing" successful the accepted sense.

The slope mislaid the assurance of investors and depositors implicit the past 2 weeks, resulting successful a freefalling stock terms and monolithic nett plus outflows, and FINMA specified Sunday that determination was a hazard Credit Suisse could go illiquid, adjacent if it was not insolvent.

Political backdrop

One of the catalysts for Credit Suisse's astir caller stock terms capitulation was the announcement from apical capitalist the Saudi National Bank that it would not beryllium capable to connection immoderate further fiscal assistance.

The acquisition of its 9.9% stake successful October played a ample portion successful backing Credit Suisse's monolithic strategical overhaul, portion the Qatar Investment Authority became the bank's second-largest shareholder aft doubling its involvement to 6.8% precocious past year.

Asked if helium thought determination was governmental information down the determination to unafraid the shares earlier AT1 bondholders, fixed the standard of Credit Suisse's anchor shareholders, Benamou said that was the "only logical explanation."

A spokesperson for FINMA was not instantly disposable for comment.

Credit Suisse's AT1 bonds offered higher yields than galore comparable assets, successful immoderate cases yielding astir 10%, reflecting the inherent hazard investors were taking.

They besides contained a clause enabling them to beryllium written down to zero by Swiss authorities should the slope nary longer beryllium viable, careless of whether banal holders were besides wiped out.

Benamou acknowledged that the output reflected the hazard of nonaccomplishment oregon "non-viability," but dismissed the proposition that the write-down was covered by the existing clause.

"In reality, they changed the instrumentality connected Sunday to let FINMA to constitute down the AT1 without immoderate constraint. Of course, determination is simply a grade of flexibility successful the prospectuses but if they alteration the instrumentality connected Sunday, it's due to the fact that they didn't person capable flexibility to constitute down the AT1s to zero," helium said.

However Mark Yallop, seat of the U.K.'s Financial Markets Standards Board and the erstwhile CEO of UBS U.K., told CNBC that it was plausible that FINMA took a "technical decision" based connected its mentation of the aforementioned write-down clause.

"This is simply a ineligible mentation of that papers and I'm definite it volition beryllium fought implicit successful tribunal successful owed course, but I deliberation it's not close to spot this arsenic a governmental fix-up to suit definite equity holders, necessarily," helium said.

"I deliberation determination is grounds to judge that FINMA astir apt felt that they were wrong their rights arsenic it were to importune connected this outcome."

British litigation specialists Stewarts suggested that acold from being an "unjustified frolic," the Swiss regulator and applicable parties volition apt person taken ineligible proposal earlier wiping retired the AT1 bondholders.

"Given the stakes, they whitethorn person considered that the hazard of aboriginal litigation is amended than the alternative, though determination is immoderate precedent successful the 2017 takeover of Banco Popular by Santander organised by the ECB oversight portion erstwhile its AT1s were wiped out," the instrumentality steadfast said successful a statement.

Some of Credit Suisse's shareholders person besides reacted angrily to the authorities' usage of "emergency measures" to unreserved done the woody without a vote.

Equity holders volition lone person payouts astatine the worth of the UBS buyout, a fraction of their worth anterior to the deal.

Vincent Kaufmann, CEO of the Ethos Foundation which holds much than 3% of the bank's stock, told CNBC connected Monday that the enactment would consult its lawyers connected a imaginable ineligible action.

Ethos, which is comprised of 246 Swiss pension programs and nationalist inferior foundations, accuses Swiss authorities of utilizing their exigency powers to walk 2 cardinal pieces of authorities without shareholder approval.