On March 19th, 2023, the Union Bank of Switzerland (“UBS”) announced its intention to acquire Credit Suisse Group AG (“Credit Suisse”), a leading global wealth manager.[1] Over the past few years, Credit Suisse has had scandals, public legal battles, and escalating losses that diminished investor confidence and caused clients to withdraw their money.[2] On March 15th, after its largest shareholder, Saudi National Bank, refused to invest additional capital into the bank, Credit Suisse asked the Swiss National Bank for a public statement of support.[3] Despite the Swiss National Bank’s offer to lend Credit Suisse $54 billion and buy back up to $3.82 billion of its debt, Swiss National Bank ultimately ushered Credit Suisse into a rescue merger agreement with UBS.
Under the terms of the agreement, Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares owned, a price of approximately $0.8191 per share or $3.23 billion in total.[4] UBS announced that the acquisition was not subject to shareholder approval after UBS obtained pre-agreement from the Swiss Financial Market Supervisory Authority (“FINMA”), Swiss National Bank, and the Swiss Federal Department of Finance.[5] Following the acquisition statement, FINMA announced that any investments in additional tier-one bonds (“AT1”) would be written down to zero as part of the merger.[6] The AT1 bonds issued by Credit Suisse make clear that the bonds will be reduced to zero in response to a “viability event.” [7] Reacting to backlash from investors, FINMA stated that a viability event had occurred once Credit Suisse was granted liquidity assistance loans secured by a federal default, which is extremely rare.[8] Further, a finding of a viability event is more likely if extraordinary government support is granted.[9] Therefore, under the merger agreement, AT1 bondholders will receive nothing. In contrast, Credit Suisse shareholders, who ordinarily rank below bondholders in the order of who gets paid when a bank fails, will receive $3.23 billion.[10] This decision to eliminate $17.5 billion of Credit Suisse bonds represents the largest loss ever inflicted on AT1 investors since the bond’s creation in response to the global financial crisis in the late 2000s.[11] In response, many AT1 bondholders have signaled their intention to sue FINMA and Credit Suisse.[12]
What are AT1 bonds?
AT1 bonds, also known as “contingent convertibles,” act as “shock absorbers” if a bank’s capital levels decrease beneath a determined threshold.[13] The bonds were established to redirect crisis risk away from taxpayers and transfer this risk to investors.[14] Thus, the bonds can be converted into equity or written off to zero.[15] Credit Suisse’s AT1 bonds contained this clause permitting the reduction by Swiss authorities if Credit Suisse was determined to no longer be viable, regardless of whether stockholders were also wiped out.[16] To account for this investor risk, Credit Suisse’s AT1 bonds offered higher yields than most comparable assets, approximately 10%, which reflected the inherent risk investors were absorbing by purchasing the bonds.[17]
How Did the AT1 Bonds Get Written Down?
On the day of the merger, FINMA changed the law in Switzerland, enacting a new provision stating: “[a]t the time of the credit approval in accordance with Article 5, FINMA may order the borrower and the financial group to write down additional Tier 1 capital.”[18] Thus, once FINMA had provided Credit Suisse with emergency liquidity support in an attempt to save the bank, AT1 bondholders would lose their investment.[19] FINMA explained that Credit Suisse had lost the confidence of its investors and depositors over the previous two weeks, which caused a rapidly declining share price and extraordinary net asset outflows.[20] FINMA feared a significant risk that Credit Suisse would become illiquid, even if it were not yet insolvent.[21]
Potential Litigation: Was the Credit Suisse Write Down Legal?
Lawyers at Quinn Emanuel Urquhart & Sullivan have already begun discussing with aggrieved bondholders how a case to recover their AT1 bond investments could be brought. [22] One potential litigation could be instituted in Switzerland against Credit Suisse by alleging or arguing that a breach of disclosure obligations had occurred.[23] Another option could be to challenge FINMA’s decision directly, asserting that its actions were “entirely arbitrary.”[24] These investors would argue that Credit Suisse was not failing and that the bonds should not have been written down. [25] At the end of 2022, Credit Suisse maintained a common equity tier-one capital ratio, a measure of bank solvency of 14.1%, and a liquidity coverage ratio of 144%.[26] Investors suggest that these numbers indicate that the bank was solvent without liquidity issues.[27] Conversely, some investors argue that the decision should be interpreted as an effective subordination of AT1 bondholders to shareholders.[28] AT1 bonds were created to absorb losses, which is precisely what the write-down has done.[29] Ultimately, litigation will likely be needed to determine if Credit Suisse’s decision to write down the AT1 bonds was legal.
[1] UBS to acquire Credit Suisse, UBS: Media (Mar. 19, 2023), https://www.ubs.com/global/en/media/display-page-ndp/en-20230319-tree.html.
[2] Myriam Balezou, Credit Suisse Is No More. What Went Wrong?, Wash. Post (Mar. 20, 2023), https://www.washingtonpost.com/business/2023/03/20/credit-suisse-what-s-going-on-and-why-is-cs-stock-falling/07e3b6b6-c714-11ed-9cc5-a58a4f6d84cd_story.html .
[3] Id.
[4] Amanda Cooper et al., Explainer: What are AT1 bonds and why are Credit Suisse’s wiped out?, Reuters (Mar. 24, 2023), https://www.reuters.com/markets/why-markets-are-uproar-over-risky-bank-bond-known-at1-2023-03-24/.
[5] See UBS: Media, supra note 1.
[6] Sophie Kiderlin, The $17 billion wipeout of Credit Suisse bondholders has not gone down well in Europe, CNBC (Mar. 20, 2023), https://www.cnbc.com/2023/03/20/17-billion-of-credit-suisse-bonds-worthless-following-ubs-takeover.html.
[7] Elliot Smith, Swiss regulator defends controversial $17 billion writedown of Credit Suisse bonds, CNBC (Mar. 23, 2023), https://www.cnbc.com/2023/03/23/swiss-regulator-says-central-bank-loan-to-credit-suisse-justified-at1-bond-writedown.html.
[8] FINMA provides information about the basis for writing down AT1 capital instruments, FINMA (Mar. 23, 2023), https://www.finma.ch/en/news/2023/03/20230323-mm-at1-kapitalinstrumente/.
[9] Id.
[10] See Cooper et al., supra note 4.
[11] Id.; see also Kiderlin, supra note 5.
[12] Giulia Morpurgo & Katharine Gemmell, Could Credit Suisse’s AT1 Wipeout End Up In Court?, Wash. Post (Mar. 23, 2023), https://www.washingtonpost.com/business/2023/03/23/could-credit-suisse-s-at1-bondholders-challenge-writeoff-in-court/4aff9282-c95b-11ed-9cc5-a58a4f6d84cd_story.html.
[13] See Cooper et al., supra note 4.
[14] Id.
[15] Id.
[16] Elliot Smith, Credit Suisse bondholders prepare lawsuit after contentious $17 billion writedown, CNBC (Mar. 21, 2023), https://www.cnbc.com/2023/03/21/credit-suisse-bondholders-prepare-lawsuit-after-at1-bond-writedown-in-ubs-deal.html.
[17] Id.
[18] See Morpurgo & Gemmell, supra note 11.
[19] Id.
[20] See Smith, supra note 13.
[21] Id.
[22] See Morpurgo & Gemmell, supra note 11.
[23] Id.
[24] Id.
[25] See Smith, supra note 13.
[26] Id.
[27] Id.
[28] See Kiderlin, supra note 5.
[29] Id.
