Credit Suisse Bondholders Given Fresh Hope by Swiss Court Ruling

(Bloomberg) — A Swiss court has given fresh hope to Credit Suisse bondholders who sought damages after their investments were wiped out when UBS Group AG rescued the bank in a government-brokered deal over two years ago.

The complainants, some 3,000 investors, had argued that the March 2023 decree to write down 16.5 billion Swiss francs ($20.5 billion) of the additional-tier 1 bonds was unlawful and should be revoked, and the write-down be reversed.

The Swiss Federal Administrative Court ruled on Oct. 1 on one of those as a test case, siding with those complainants’ right to appeal and revoking the decree, according to a statement from the tribunal on Tuesday.

The court said it has not yet decided on the reversal request and that the other cases are now suspended until the decision regarding the revocation of the decree becomes final. That means any actual compensation could be years away.

The wipeout of the convertible debt known as AT1 bonds amid the rescue of Credit Suisse was a highly controversial part of the government’s response to the crisis at its country’s second-largest bank, given that typically shareholders absorb losses before bondholders. The government and regulator Finma contended at the time that investors should have known about the conditions contained in the bonds’ fine-print.

“There’s still lots of legal uncertainty that can go on for years,” said Mark Lieb, founder of Spectrum Asset Management in Stamford, Connecticut, which has about $18 billion in assets under management. “If it comes to the payments of AT1 holders the big question is, who is going to do it? Will it be Finma? UBS can’t do it because Credit Suisse was given to them. And it won’t be the Swiss tax payer. In any case, UBS can’t be happy about this decision.”

Thomas Werlen, Quinn Emanuel’s lead Swiss lawyer who represented some of the biggest bondholders in the appeal, said he and his colleagues are reviewing the ruling.

“We welcome the Federal Administrative Court’s ruling that the decision to write down our clients’ AT1 bonds was unlawful,” he added.

UBS and Finma declined to comment. UBS shares fell after the news and were down 2.1% to trade at 31.80 Swiss francs at 4:50 p.m. in Zurich.

Prices on claims tied to the Additional Tier 1 bonds rose rapidly after the court ruling was published.

Dealers are willing to buy claims for as much as 22 cents on the dollar, according to three people who have seen the quotes. The last quoted prices before the court’s announcement stood at about 12 cents, the people said.

Ever since their wipeout, Credit Suisse AT1s are no longer treated as securities, with coupons to be paid and clauses that UBS needs to abide by. Instead, dealers and investors trade claims on any potential payouts or even the bonds themselves if they are ever regain their status as securities.

Finma, the Swiss government and the Swiss National Bank, which together took the write-down decision as part of the rescue of Credit Suisse, can appeal this verdict to the Swiss Supreme Court.

Revoked not reversed

The decision has breathed fresh life into the claims, which number in the hundreds. However, the decree has for now only been revoked, not reversed and so the timing for any compensation or who would have to pay it remains unclear.

First they will have to wait for the likely challenge at the Supreme Court. Second they must also secure a decision that the decree be reversed, a decision which would also have to be upheld by the country’s top court in the face of any challenge.

“The bondholders’ property rights were seriously interfered with, which would have required a clear and formal legal basis,” the court said in the ruling. “But no such basis existed.”

The clause in Swiss banking law invoked by Finma and the government to oppose the complainants’ right to appeal “is too vague to be relied upon for a write-off of third-party rights under the principle of legality.”

–With assistance from Esteban Duarte and Jan-Henrik Förster.

(Updates with investor comment in sixth paragraph)

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