A group of Credit Suisse investors who lost bonds worth more than CHF 4.5bn (£4bn) are suing Switzerland’s financial regulator over a decision to wipe out risky bank debt after an emergency merger with UBS last month.
The investors filed their claim at a court in St Gallen, in the north-east of Switzerland, weeks after Swiss authorities orchestrated the takeover of Credit Suisse by its larger rival UBS, to try to stem a crisis of confidence in the global banking sector.
The bondholders are being represented by the law firm Quinn Emanuel Urquhart & Sullivan, which said it had assembled a “multi-jurisdictional team of lawyers” from across Switzerland, the US and the UK.
They are challenging the Swiss Financial Market Supervisory Authority’s (Finma) decision to trigger a “complete write-down” of the value of all of the bank’s so-called AT1 bonds as part of the UBS takeover.
It resulted in Credit Suisse bondholders losing a total of CHF 16bn-worth of bank debt, contrary to conventional rules that usually mean equity investors – those who hold shares – are wiped out before their debt-holding peers.
Thomas Werlen, the managing partner of Quinn Emanuel in Switzerland, said: “Finma’s decision undermines international confidence in the legal certainty and reliability of the Swiss financial centre. We are committed to rectifying this decision, which is not only in the interests of our clients but will also strengthen Switzerland’s position as a key jurisdiction in the global financial system.”
Typically when a company goes bust, bondholders rank above shareholders in the creditor pecking order in terms of recoveries that can be paid. However, the value of AT1 bonds have been wiped out entirely as a result of the UBS deal, while Credit Suisse shareholders took a significant cut in the value of their shares.
The unusual move sparked a sell-off in the AT1 bond market, as investors feared conventions would be scrapped if other banks fell into trouble.
Central banks in other jurisdictions, including the UK and eurozone, were subsequently forced to issued statements to reassure investors the Swiss decision would not set a precedent and that their jurisdictions would follow a hierarchy in which equity-holders would lose out before bondholders.
Richard East, a senior partner in Quinn Emanuel’s London office, said the lawsuit against Finma was “the first in a series of steps” the law firm would take in seeking redress for its clients who had “been unlawfully deprived of their property rights”.
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Finma has previously said the AT1 bond contracts allow for write-downs in some cases, including where there is extraordinary government support. It has said the government’s decision to provide emergency liquidity for the deal through the Swiss National Bank also gave the financial regulator authority to write down the debt.
A spokesperson for Finma declined to comment on the lawsuit. Credit Suisse also declined to comment.
