Recently, a group of Credit Suisse bondholders initiated legal action against the Swiss government, demanding full compensation for the decision to write down the failed bank’s Additional Tier 1 (AT1) debt. This move came in the aftermath of Credit Suisse’s emergency sale to UBS last year, facilitated by the Swiss government. Swiss regulator Finma chose to eliminate approximately $17 billion of the bank’s AT1s, reducing them to zero value. While the common shareholders of the bank received payouts during the sale, this decision enraged bondholders who felt that their rights had been disregarded.
Legal Action and Arguments
Law firm Quinn Emanuel Urquhart & Sullivan, representing the plaintiffs, took the case to the U.S. District Court for the Southern District of New York. The lawsuit contends that Switzerland’s action of reducing the AT1 bond value to zero amounted to an infringement on the property rights of the AT1 Bondholders. The spokesperson for the Swiss Finance Ministry declined to offer any comments on the situation, while Finma justified its move as a necessary response to a “viability event” involving Credit Suisse.
The lawsuit has brought to light a broader issue concerning the post-financial crisis Basel III framework and the pecking order of restitution in bank failures. Under normal circumstances, AT1 bondholders are given priority over stock investors in receiving compensation following a bank collapse. However, the Credit Suisse incident has disrupted this hierarchy, causing unrest among bondholders who feel shortchanged by the Swiss government’s intervention.
Additional Tier 1 bonds are viewed as a risky form of junior debt issued by banks. They were introduced in the aftermath of the 2008 financial crisis to enhance financial institutions’ capital reserves and safeguard against future economic downturns. AT1 bonds are structured to absorb losses by automatically converting into equity when a pre-defined capital threshold is breached. The face value of the AT1 bonds held by the plaintiffs in the lawsuit was reported to be over $82 million.
The legal battle between Credit Suisse bondholders and the Swiss government underscores the complex dynamics and challenges in resolving bank failures. The outcome of this lawsuit will not only impact the involved parties but also set a precedent for future cases involving AT1 bondholders and regulatory authorities. It remains to be seen how the courts will interpret the competing claims and rights of all stakeholders involved in this contentious issue.