Credit Suisse AT1 Bondholders Angle for Lehman-Style Payouts

(Bloomberg) — A group of investors that hold claims tied to about $17 billion of bonds wiped out in the rescue of Credit Suisse are pointing to another failed bank as an example of the potentially lucrative payday they’re holding out for: Lehman Brothers.

A surprise Swiss court decision this week has fueled their hopes. The ruling, which has already been challenged by the country’s financial regulator, revoked the 2023 order to zero about $17 billion of Additional Tier 1 notes as part of Credit Suisse’s takeover by UBS Group AG.

The decision lays the ground for a lengthy legal battle — with a potentially lucrative endgame.

Lehman claims are famous for having handed huge gains to those who bought them at knockdown prices. Creditors of the key London-based entity, Lehman Brothers International Europe, saw their principal repaid in full as well as receiving generous interest payments on top.

Credit Suisse holders are eyeing a similar payout, according to two investors who declined to be named as they are not authorized to speak publicly on the matter.

Redwood Capital Management, Diameter Capital Partners and 140 Summer Partners are among holders of the claims, according to people with knowledge of the matter, who asked not to be named discussing confidential information. Representatives for those firms declined to comment. Funds affiliated with Appaloosa LP were holders at least as of last year. A representative for Appaloosa declined to comment.

For more than two years, the AT1s lost their status as securities, with all the associated coupon payments, investor rights and borrower obligations. Instead, holders of the old Credit Suisse AT1s have been left with nothing more than just claims on a potential settlement.

Romain Miginiac, fund manager and head of research at Atlanticomnium, which manages funds that had exposure to the AT1s when they were wiped out, said his firm is weighing up scenarios.

Investors are looking at a wide range of possibilities, from full face value plus accrued interest to a more modest 3 billion Swiss francs ($3.75 billion) similar to the amount Credit Suisse shareholders got.

Uncertain, Complex

“The case remains uncertain and complex,” Miginiac said. “If bondholders do end up being compensated, the amount is also uncertain.”

In the meantime, prices reflect growing optimism. Claims to Credit Suisse AT1s, quoted in a niche secondary market, have surged from about 12 cents on the dollar to around 30 cents after the Swiss court’s announcement Tuesday, according to people familiar with the situation.

“This ruling represents a crucial step toward ending a prolonged period of uncertainty for our clients, who have waited far too long for justice,” said Natasha Harrison, founder and managing partner of law firm Pallas Partners, which acts on behalf of some Credit Suisse bondholders.

“By finding that the so-called ‘viability event’ never occurred and the writedown had no other legal basis, the Court has set the record straight and paves the way for our clients to finally receive the redress they deserve,” she said.

Finma, the Swiss banking watchdog, has already said it would appeal against the decision by the Federal Administrative Court. This appeal and the fact that the court has yet to issue a decision on actually reversing the order to write down the bonds means the prospect of any compensation for bondholders remains distant.

And even in Lehman’s case, investors in notes issued by a European entity were only compensated more than a decade after the New York-based bank became the most high-profile victim of the global financial crisis.

“It’s a very positive first step but definitely not a done deal,” Miginiac said.

–With assistance from Esteban Duarte, Lucca de Paoli, Eliza Ronalds-Hannon and Sridhar Natarajan.

(Adds names of claims holders in sixth paragraph.)

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