A group of Credit Suisse bondholders has filed a lawsuit against the Swiss government in an effort to obtain compensation for the controversial decision to write down the debt of an Additional Tier 1 (AT1) financial institution.
Last year, the mentioned bank, the process of which existence in the previous regime could not continue for objective financial reasons, entered the ownership structure of UBS. The corresponding deal was initiated by the Swiss government. The local regulator Finma wiped out the assets of AT1 bank for about $ 17 billion. After the deal was implemented, Credit Suisse shareholders holding ordinary equities received payouts. This action provoked discontent among bondholders. In the context of the negative criticism of the mentioned decision, a statement circulated that the standard European hierarchy of restitution for losses in the bankruptcy of a financial institution had been radically changed within the framework of the rules of the Basel III post-crisis system, in which AT1 bondholders are above stock investors.
The law firm Quinn Emanuel Urquhart & Sullivan, which represents the interests of the plaintiffs, on Thursday, June 6, announced that it filed a lawsuit in the United States District Court for the Southern District of New York. The mentioned company characterized Switzerland’s decision to write down the value of the plaintiffs’ AT1 bonds to zero as an unlawful encroachment on the property rights of AT1 bondholders.
A spokesperson for the Swiss Finance Ministry declined to comment on the lawsuit.
Finma justified the decision to instruct Credit Suisse to write down AT1 bonds in March 2023 as a viability event.
Dennis Hranitzky, partner and head of Quinn Emanuel’s Sovereign Litigation practice, says that the actions committed by the Swiss government wiped out AT1’s assets worth $17 billion. Also in this context, the fact of violation of the property rights of the owners of the mentioned instruments was noted.
The face value of the AT1 bonds, held by the plaintiffs in the lawsuit, amounted to more than $82 million. The relevant information was published by the media with reference to the case materials.
AT1s belong to the category of bank bonds, which are characterized as a relatively risky form of junior debt. The corresponding bonds date back aftermath of the global financial crisis of 2008 when regulators tried to shift risks away from taxpayers to banks and increase the capital held by lenders to ensure security in case of a repeat of such scenarios.
One of the main features of AT1 is that these debt securities are designed to absorb losses. The corresponding procedure is carried out automatically when the capital ratio decreases below the previously agreed threshold. In this case, the mentioned bonds are converted into equity.
Credit Suisse was on the verge of bankruptcy in March 2023. At that time, the global banking sector faced such a shock as the collapse of Silicon Valley Bank. In March last year, the share price of Credit Suisse fell by more than 30%. UBS acquired the bank for $3.24 billion.
In February 2022, Credit Suisse was accused of storing large sums of money from citizens of different countries accused of involvement in illegal activities. The bank denied engagement in this practice. The charges were brought by journalists, who in this case based their position on information obtained as a result of a major leak of documents.
As we have reported earlier, UBS Plans to Shut Thousands of Smaller Credit Suisse Asia Accounts.
