Bondholders Sue Switzerland in US Over Credit Suisse AT1s

(Bloomberg) — A group of investors in Credit Suisse Group AG bonds that got wiped out when UBS Group AG rescued the bank in a Swiss government-brokered deal are suing the country in New York as they take their fight abroad. 

The lawsuit, filed Thursday in federal court in New York, seeks more than $82 million plus interest. More strategically, it’s an attempt to move the battle to a jurisdiction their lawyers argue offers both a more sympathetic hearing and more scope to uncover possible evidence during a discovery process that Switzerland lacks.  

“It’s always been my client’s belief that it’s best to provide a litigation hedge against the home-court advantage that the Swiss government is certainly likely to have in their own Swiss courts,” Dennis Hranitzky said in a TV interview with Bloomberg. The “injury” happened in New York “so it makes New York a logical place to bring the suit.”

Holders of Credit Suisse’s additional tier 1 bonds effectively saw about $17 billion of their notes written down to zero after the sale. Meanwhile, the bank’s common shareholders were paid billions of francs when Credit Suisse was sold to UBS, a move that many investors saw as upending a capital markets convention that stockholders are the first to absorb losses. 

Spokespeople for the Swiss finance ministry and the banking regulator Finma declined to comment.

Switzerland’s direction to write down the value of the AT1s to zero as part of the sale of Credit Suisse to UBS was “an unlawful encroachment on plaintiffs’ property rights,” lawyers at Quinn Emanuel Urquhart & Sullivan, representing the bondholders, wrote in the complaint.

The writedown, made possible by a clause in the fine print of the high-risk bonds, has spawned more than 100 claims but those in Switzerland face an uphill battle in the Swiss courts. That in part has prompted bondholders to file separate cases elsewhere in Europe and the US. 

“We generally think bondholders face headwinds in these cases given the language of the bond documentation,” BI litigation analyst Elliott Stein said. “And in this case, the Swiss government will also likely have sovereign immunity and forum non-conveniens arguments.”

Bounce Back

The lawsuit in New York comes at a time when investors, in a rush to lock in higher yields before the Federal Reserve starts cutting rates potentially later this year, are willing to buy riskier credit. Bond titans, including Pacific Investment Management Co., Invesco Ltd. and JPMorgan Asset Management, have been loading up on the bonds lately.

Bondholders are also betting that any potential slowdown of economic growth won’t be severe, and the global banking industry is in a much better position. 

AT1s, the riskiest type of debt banks can sell, were introduced after the financial crisis to ensure bondholders take losses first when a bank is in trouble while taxpayers are off the hook. The market shut down for months following the historic Credit Suisse writedown.

Since then, however, AT1s have come roaring back. In the first three months of 2024 the asset class clocked up its busiest quarter of issuance since before the pandemic and outperformed almost every other part of the corporate credit market. 

The case is Creditincome Ltd. v. The Swiss Confederation, 24-cv-04316, U.S. District Court, Southern District of New York. 

–With assistance from Bruce Douglas, Bastian Benrath and Sonali Basak.

(Updates with comments from Quinn Emanuel’s Hranitzky in third paragraph)

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