Credit Suisse has privately challenged the devaluation of the FINMA’s AT1

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Credit Suisse has directly challenged the Swiss financial regulator’s basis for devaluing $17 billion of its additional Level 1 bonds, in a private letter aimed at saving debt-related staff bonuses.

Investors representing at least $4.5 billion of wiped out Credit Suisse AT1 bonds filed lawsuit against FINMA last monthseeking to undo the Swiss regulator’s write-off of their holdings, imposed as part of the bank’s shotgun wedding with UBS two months ago.

Bondholders injured earlier this month forced the FINMA to do so deliver a decree had issued to Credit Suisse on March 19 – the day the UBS merger was hit – ordering the bank to write down AT1 bonds.

The decree clarified that the regulator believed a “feasibility event” — a term in the contract that required a writedown — had been triggered because government-guaranteed liquidity facilities had also bolstered the bank’s capital.

However, the bondholders also forced the FINMA to deliver a subsequent decree issued on March 22 clarifying that Credit Suisse did not agree with this interpretation of the contracts.

The second decree refers to a March 20 letter sent by Credit Suisse to the FINMA stating that the contractual conditions for a write-down were not met, stating: “[Credit Suisse Group] further argues that no contractual “profitability event” occurred because the state support did not have a compounding effect.

Thomas Werlen, a partner of Quinn Emanuel who leads the litigation against Finma, described the language as “pretty harsh” and said the document was “even more useful” to the bondholders’ cause than the previous decree.

“Both sides of the contract say the same thing: the writer and the reader, i.e. Credit Suisse and the investors, agree,” he added. “Only a third party – the FINMA – interpreted it differently”.

This letter was intended to spare Credit Suisse’s senior bankers from so-called “contingent capital awards”, a portion of their bonuses that were tied to AT1s. Credit Suisse “advised against” Finma ordering a writedown of CCAs in its letter, but the regulator disagreed and replied that AT1-linked instruments were also covered by its previous ruling.

AT1s are a type of hybrid debt instrument created after the 2008 financial crash to give banks greater capital flexibility in the event of a crisis.

The second decree was published in full online last week by Antigua news, local news. The Financial Times separately obtained a copy of the decree and verified its authenticity with several people with direct knowledge of the situation.

Credit Suisse and FINMA declined to comment.

The document also sheds new light on why the Swiss government felt it necessary to pass an emergency ordinance over the weekend that gives FINMA the ability to order Credit Suisse to write down bonds. People familiar with the litigation noted that this may have been necessary because the Swiss bank did not agree with FINMA’s interpretation of the contracts.

THE reported FT Credit Suisse staff are preparing to sue the Swiss financial regulator on Monday over more than $400 million in bonuses in former CCAs that were canceled following UBS’s bailout of the bank.