Switzerland faces fresh AT1 bond case after Credit Suisse collapse

Credit Suisse, new case against Switzerland for AT1 bonds Keystone-SDA

A British law firm is bringing a case against Switzerland in connection with the writedown of AT1 bonds during the buyout of Credit Suisse by UBS.

British-based Holman Fenwick Willan (HFW) wants to drag the Swiss government before the World Bank’s arbitration tribunal to seek compensation for investors from Singapore, China and the Middle East, according to media reports.

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The lawsuit, reports Swiss portal Finews.ch, quoting a statement by HFW, “will be filed with the Washington-based World Bank’s International Centre for Settlement of Investment Disputes (ICISID)”.

The plaintiff is a group of former holders of Credit Suisse AT1 bonds: HFW’s Singapore-based clients held $80 million (CHF64.2 million) of these securities, while Chinese and Middle East-based creditors held another $300 million.

According to Finews, this would be the first such case to be heard by the ICISID.

The subject of the dispute is thus once again the famous AT1 bonds: during the March 2023 takeover of Credit Suisse by UBS, the Swiss financial supervisory authority Finma reduced the value of these bonds to zero, amounting (in nominal terms) to a write-down of some CHF16 billion. The decision was part of a deal orchestrated by the Swiss Federal Council – under international pressure – outside the existing legal system, on the basis of emergency law and using extensive state guarantees. The move caused an earthquake on the bond markets, generating heavy losses for investors.

Created in the wake of the 2008 financial crisis, AT1 (Additional Tier 1) bonds are debt securities which belong to the category of financial instruments defined as “capitalisation instruments” (or “hybrid capital instruments”) by the Basel III international standards, provisions aimed at improving the solidity of institutions and averting meltdowns.

AT1s are higher-yielding securities than others, because they are exposed to greater risks: in the event of a triggering event, such as a state bailout, AT1s can include clauses to see them being written off or converted into shares. In March 2023, Finma stated that the acquisition of Credit Suisse by UBS was precisely one such event.

In the case of Credit Suisse, many investors would have expected a conversion into shares (the value of which plummeted, but still remained real: they were then exchanged for UBS shares at a ratio of 22.48 to 1), but not a full write-off. It seemed unusual in the eyes of quite a few traders that in a corporate crisis, the bondholder was in a worse position than the shareholder.

Several investors are therefore trying to recover their money by putting Switzerland in the dock, with lawsuits being filed both in Switzerland and abroad. In the US, class actions have also been filed against UBS, as well as against Switzerland. On the domestic front, the Federal Administrative Court may decide this year on a complaint filed by some 3,000 AT1 investors against Finma.

Translated from Italian by DeepL/dos

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