A group of Credit Suisse bondholders has filed a lawsuit against the Swiss government, seeking full compensation for the write-down of the failed bank’s Additional Tier 1 (AT1) debt. Last year, as part of Credit Suisse’s emergency sale to UBS, the Swiss government orchestrated a move that wiped out roughly $17 billion of the bank’s AT1s, reducing them to zero. While the bank’s common shareholders received payouts as a result of the sale, the bondholders were left empty-handed, sparking controversy over the hierarchy of restitution in the event of a bank failure under the Basel III framework.
Law firm Quinn Emanuel Urquhart & Sullivan is representing the plaintiffs in the lawsuit, which has been filed in the U.S. District Court for the Southern District of New York. The firm alleges that Switzerland’s decision to write down the plaintiffs’ AT1 value to zero was an unlawful violation of the bondholders’ property rights, amounting to unjust treatment of the holders of these instruments. The Swiss Finance Ministry has declined to comment on the matter, while Finma, the Swiss regulator, defended its decision to instruct Credit Suisse to write down its AT1 bonds as a “viability event” necessary for the bank’s stability.
The face value of the AT1 bonds held by the plaintiffs in the lawsuit totaled over $82 million, according to Reuters. These bonds are considered a risky form of junior debt and were introduced in the aftermath of the 2008 global financial crisis as a way to shift risk away from taxpayers and bolster financial institutions’ capital reserves. AT1 bonds automatically absorb losses when a bank’s capital ratio falls below a certain threshold, triggering their conversion into equity. The plaintiffs are seeking full compensation for the loss of value in their AT1 bonds as a result of the Swiss government’s intervention in Credit Suisse’s restructuring.
The contentious issue of AT1 bond write-downs highlights the complexities and challenges involved in the resolution of failing banks and the protection of investor rights. The post-financial crisis regulatory framework of Basel III aims to strengthen the resilience of financial systems and prevent collapses like those seen in 2008. However, the implementation of these regulations can sometimes result in disputes between different classes of investors and conflicting interpretations of the rules governing bank restructuring. The outcome of the lawsuit filed against the Swiss government by Credit Suisse bondholders will likely have implications for future bank resolutions and the treatment of AT1 bondholders in similar situations.
The lawsuit filed in the U.S. District Court sheds light on the global ramifications of the Credit Suisse bond write-downs, as international investors seek redress for what they perceive as an unjust treatment of their financial interests. The involvement of a prestigious law firm in representing the plaintiffs underscores the significance of the case and the potential impact it could have on the wider financial industry. The resolution of this lawsuit will depend on legal arguments related to property rights, regulatory compliance, and the interpretation of banking regulations in the context of bank restructurings.
Overall, the lawsuit filed by Credit Suisse bondholders against the Swiss government over the write-down of AT1 bonds raises important questions about investor protections, regulatory compliance, and the balance of power between different classes of stakeholders in the event of a bank failure. The outcome of this legal battle will be closely watched by market participants, regulators, and policymakers as they navigate the complexities of financial systems and strive to prevent future crises. The case underscores the need for clear and transparent rules governing bank resolutions and the importance of upholding investor rights in a time of economic uncertainty and regulatory changes.
