EXPLAINER: Credit Suisse bondholders seek legal advice on AT1 wipeout


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EXPLAINER: Credit Suisse bondholders seek legal advice on AT1 wipeout

CREDIT SUISSE. A person walks past the Credit Suisse office in Canary Wharf in London, Britain, March 20, 2023.

Hannah McKay/Reuters

The Swiss regulator's decision inverts the long-established seniority of bondholders over shareholders over the assets of a company in distress

LONDON, United Kingdom – Credit Suisse bondholders are seeking legal advice after the Swiss regulator ordered 16 billion Swiss francs ($17.5 billion) of Additional Tier 1 (AT1) debt to be wiped out under its rescue takeover by UBS.

These higher-yielding junior bonds emerged from the 2008-2009 crisis as a way to boost bank capital while shifting the risk of losses to investors and away from taxpayers.

Lawyers and dealmakers said the AT1s, which have dropped in value to just a few cents in the dollar following the move, are being traded by hedge funds in a so-called litigation play.

Here’s a look at the potential for litigation.

Why is this a big deal?

The Swiss regulator’s decision inverted the long-established seniority of bondholders over shareholders over the assets of a company in distress. Not only did bondholders expect protection, but UBS is paying $3.23 billion to Credit Suisse shareholders.

This angered some investors and has prompted lawyers to start investigating potential litigation.

Other AT1 bonds fell in price on Monday, March 20, on fears about the prospect of losses should other banks get into difficulty.

The bonds in the $275-billion market are designed to be shock absorbers if a bank’s capital levels fall below a threshold. They are then converted into equity or written off.

Who is involved?

Law firms including Quinn Emanuel Urquhart & Sullivan, Pallas Partners, and Korein Tillery say they are speaking to prospective bondholder clients about bringing claims.

In a call on Wednesday, March 22, which drew more than 750 attendees, Quinn Emanuel raised the prospect of pursuing claims in Switzerland and elsewhere, sources with knowledge of the matter told Reuters.

One Paris-based manager of a debt fund that held Credit Suisse AT1s said he had been “spammed” with emails from lawyers.

Is there an opportunity?

Some distressed debt-type funds have been buying Credit Suisse’s AT1s for a few cents on the dollar. The bonds were traditionally held by institutional investors.

Samuel Norris, special situations partner at law firm Ropes & Gray in London, said he had been instructed by a number of hedge funds interested in trading the debt on the back of litigation news.

But five European and UK-based asset managers, identified by fund tracker Morningstar as among the top 50 European holders of the debt, told Reuters they were reluctant to join a court case that could take years.

The owner of a Hong Kong-based distressed debt fund said he had been approached by US law firms, but was not interested.

Facing any challenge could be Credit Suisse, its new owner UBS, Swiss regulator FINMA, or the Swiss government.

What have the Swiss said?

FINMA on Thursday, March 23, defended its decision, saying the move was legally watertight because of both the bond prospectuses and emergency government legislation.

FINMA said the bonds contractually allow for a total write-down in a “viability event,” “in particular if extraordinary government support is granted,” which occurred when Credit Suisse was given “extraordinary liquidity assistance loans secured by a federal default guarantee.”

It also cited an emergency ordinance on Sunday, March 19, which it said authorized FINMA to instruct Credit Suisse to write off the bonds.

Hong Kong, Singapore, the European Union, and Britain all said this week they would stick to the traditional hierarchy of creditors claims in the event of a bank collapse.


A dispute over the write-off of around $1-billion AT1s issued by India’s Yes Bank in March 2020 after the Reserve Bank of India initiated a restructuring of the lender is currently subject to court proceedings.

In 2017, holders of Spain’s Banco Popular stocks and AT1 bonds were wiped out when the bank was taken over by Santander, although bondholders lost out alongside the shareholders.

Bondholders took legal action against the regulator but have been so far unsuccessful.

Does litigation stack up?

Lawyers, bondholders, and banking analysts have been poring over the bond documentation to see if it allowed for the wipeout.

The Swiss government on Sunday said that FINMA had been “provided with a clearer legal basis so that part of Credit Suisse’s regulatory capital can be written off.” FINMA believes both the contracts and the emergency ordinance are on its side.

But some lawyers are undaunted, although none thinks a claim would be resolved quickly.

London-based Pallas Partners said it was working on possible legal action with Swiss peers. Four other lawyers in London said they were also examining the potential for lawsuits – some on behalf of both bondholders and shareholders.


$1 = 0.9164 Swiss francs

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