Asian AT1 bondholders sue Switzerland regulator

Adding to the number of international lawsuits being filed against the Swiss government, Asian investors have also sued the government for the way it forced Credit Suisse to merge with larger rival UBS, citing fears that Credit Suisse could collapse. The move led to the wipe out of $1.7 billion worth of bonds held by the investors.

With this suit, the Swiss government faces legal action from investors holding up to one third of the $17bn in AT1 bonds that were issued by Credit Suisse.

What are AT1 bonds?

Companies sell bonds to investors to raise funds for their growth or sustenance and pay back over time, with a premium. The bonds referred to here are AT1 bonds or contingent convertibles. They normally offer high returns with high underlying risks. They are also considered among one of the riskiest bonds issued by banks.

Concerns raised about debt prioritization 

Investors raised serious concerns about the way the merger of Credit Suisse and UBS was conducted. While investors are aware that in severe circumstances this type of debt carries the risk of being written down to zero, their concerns are more around prioritization of different types of debtors in the scenario of a bank collapsing.

According to the terms of the bonds, if a bank fails, bondholders, to the extent possible, have to be compensated first, followed by some shareholders. However, this was not followed in this case as shareholders were allowed to exchange their Credit Suisse shares for UBS shares, though at a significantly reduced value.

Epaminontas Triantafilou, from the law firm Quinn Emanuel, said, “In simple terms, bondholders were deprived entirely of the value of their bonds through a series of irregular administrative acts.” The firm has also termed FINMA’s decision as “unlawful” with a devastating impact on thousands of small and retail investors across the world.

Did Credit Suisse mislead by giving false assurances?

Investors have also been raising concerns about the way they received constant reassurance and encouragement from Credit Suisse to buy bonds, even as late as mid-March 2023. 

Vinit Chandra, a bondholder in Singapore, said that authorities at Credit Suisse were quite confident that bond write-offs would just not happen and that they were quite far away.

While neither Credit Suisse nor FINMA has commented on the lawsuits, in March 2023, FINMA had said that “the contractual conditions” for a write-down were met, as reported by BBC.

Outlook 

The lawsuits may not be able to bring relief to investors. However, given that Swiss law only allows a limited time frame during which claims can be submitted, bondholders are of the view that the time to officially raise their concerns is now or never. There is also some hope that with such a large number of investors coming together to file lawsuits, the power of the collective could have a positive effect.

There is a general sentiment among investors that trust in Switzerland as an investment destination has been eroded as a result of this action.