Credit Suisse bondholders force Swiss regulator to release AT1 cancellation order

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Credit Suisse bondholders forced the Swiss financial regulator to disclose the ruling that canceled their investments, handing them an early victory in the legal battle to reverse the controversial devaluation.

Investors representing at least $4.5 billion of Credit Suisse additional Tier 1 bonds filed lawsuit against FINMA last month. The lawsuit accuses the Swiss banking regulator of acting unconstitutionally when it ordered the bank to write off $17 billion in AT1 bonds as part of its shotgun wedding with UBS two months ago.

The aggrieved investors and their law firm Quinn Emanuel had to launch their challenge largely in the dark, as the FINMA had kept the text of its ruling order secret Credit Suisse devalue their investments.

However, the judge overseeing the case, which was filed in the eastern Switzerland city of St. Gallen, ordered the financial regulator to deliver the ruling last week, giving AT1 bondholders a firmer foothold. to challenge the devaluation.

In addition to the decree that Fina issued to Credit Suisse directing the bank to cancel the AT1 bonds, the Swiss government issued two emergency orders explicitly expanding the regulator’s powers under Swiss law to do so.

The first order on Thursday, March 16 did not mention AT1 bonds. But on Sunday, March 19, when the bailout was finalized, officials added the sentence: “The FINMA can order the borrower and the finance group to write down further Tier 1 capital.” The government said this gave FINMA a “clearer legal basis” to cancel the bonds.

FINMA said publicly that the contractual conditions to write down the bonds were met, because Credit Suisse drew on government-guaranteed liquidity lines in the days leading up to its bailout by UBS.

This prompted outcry from bondholders because AT1 bonds could only be written down if government assistance also bolstered the bank’s capital ratios, which many investors argued was not the case as the Swiss authorities only intervened to help the liquidity of Credit Suisse.

A copy of the FINMA decree seen by the Financial Times said the government relief had “a direct positive effect on the liquidity and capital situation”. The regulator added that this satisfied a so-called “viability event” clause in the bond documents and meant that Credit Suisse “could then cancel AT1 instruments on its own initiative.”

One bondholder said that the fact that the decree explicitly sets out FINMA’s interpretation of the contracts governing AT1 bonds gives them a clearer opening to challenge the writedown.

“Before it seemed like I was fighting a law, or an ordinance, that made it a constitutional fight” where investors were less likely to prevail, he said. “Now he’s back in the realm of contracts.”

The investor also argued that the Finma’s reasoning that drawing on the liquidity lines would also strengthen Credit Suisse’s capital was “absurd” and could set a worrying precedent in the European bank equity bond market.

“For a bank supervisor to say such a thing is unbelievable,” he added. “If every time a bank draws money from the central bank it triggers its AT1s, then we’d be in trouble.”

Finma declined to comment.

The decree also sheds further light on the extent of the bank run that hit Credit Suisse in the days leading up to the takeover deal.

Finma noted that following a series of drawdowns in the wake of a US regional lender crisis, Credit Suisse “reached its internal liquidity limit with the Swiss National Bank” in mid-March and that a drop below this value risked that the bank “would no longer be able to carry out its payment transactions correctly”.

Credit Suisse requested CHF 39 billion of liquidity assistance from the SNB on March 15, which was granted the following day. After the bank was hit by CHF14 billion of outflows in a single day on March 16 and faced further withdrawals the next day, Credit Suisse requested an additional CHF 20 billion liquidity facility on March 17 .

Secondly, because the “liquidity situation a [Credit Suisse] worsened despite all the measures taken”, the Swiss government had to provide a “guarantee of default” to activate the “liquidity loan” to the bank on March 19, the day of the acquisition.