Credit Suisse stock falls: Credit Suisse bondholders take legal action against AT1 write-down

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The bondholders, who hold around 4.5 billion Swiss francs of subordinated Credit Suisse bonds, want the decision to write off their bonds reversed or changed. This emerges from a draft of their appeal filed in a Swiss administrative court and viewed by the Wall Street Journal. The bondholders allege that the cumulative write-down disproportionately disadvantages them and violates their property rights, the summary of the complaint states. In addition, the write-down of the bonds does not serve the purpose of financially restructuring Credit Suisse and has damaged the confidence of international investors in Switzerland.

“The lawsuit filed on Tuesday was the first step in a series of actions we will be taking to compensate our clients who have been wrongfully deprived of their property rights,” said Richard East, a London-based partner at Quinn Emanuel Urquhart & Sullivan LLP, the law firm that filed the Swiss lawsuit.

The lawsuit opens a new front in addressing the financial fallout from last month’s abrupt bailout of Credit Suisse, which severely damaged Switzerland’s reputation as a wealth manager.

Market participants were stunned when Swiss authorities wrote off $17 billion of Additional Tier 1 (AT1) bonds in March as part of UBS’s $3.25 billion purchase of Credit Suisse. Normally, the share capital would have to be fully utilized before creditors would have to incur losses or need to be bailed out.

However, Swiss financial regulator Finma ruled that the $17 billion Additional Tier 1 debt under the bailout can be written off as the government backed UBS’s $3 billion purchase of Credit Suisse in March. In addition, on March 19, the day UBS took over the bank, Swiss lawmakers granted Finma emergency powers to write off the AT1 bonds. However, Credit Suisse shareholders will receive more than $3 billion in UBS stock for their stake in the bank.

Finma justified its decision by saying that the AT1 bonds were designed in such a way that they could be written off before the shares. Had the regulator wound up and recapitalized the bank, the bank’s equity would have been used first before the bonds were called, according to previous statements by the Swiss regulator about its procedures.

Banking regulators created AT1s after the 2008 financial crisis as a form of bank capital to help financial institutions absorb losses in a downturn. AT1 bonds, also known as contingent convertible bonds or cocos, can be converted into equity or written off in extreme stress situations, depending on their terms.

Credit Suisse shares temporarily lost 1.25 percent on the SIX to CHF 0.787.

By Alexander Saeedy and Margot Patrick

LONDON (Dow Jones)

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