Credit Suisse AT1 write-down revoked in partial win for investors

ZURICH – A Swiss court decision has given fresh hope to Credit Suisse bond holders, including those in Singapore, who sought damages after their investments were wiped out when UBS Group rescued the bank in a government-brokered deal.

The complainants, some 3,000 investors, had argued that the March 2023 decree to write down 16.5 billion Swiss francs (S$26.7 billion) of additional-tier 1 bonds (AT1s) 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 Oct 14.

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.

Around 300 Singaporean AT1 investors are among those claiming losses amounting to about US$250 million (S$324 million), Drew & Napier said in February.

The law firm is leading an action against the Swiss government to recover the losses from the write-down of the AT1s arising from UBS’ takeover of Credit Suisse.

Its lawyer Mahesh Rai, who is leading the case alongside Jonathan Yong, told The Straits Times on Oct 16 that he welcomed the court’s decision.

Said Mr Rai: “Drew & Napier is representing some 560 bondholders worldwide who have been affected by the write-down. We will be launching shortly the investment treaty claim on behalf of Japanese, Singaporean and Hong Kong bondholders to claim damages for the write-down and to seek justice for the bondholders.”

It is the first time that such a large number of investors is bringing an investment treaty claim against the government of Switzerland and the sum of the claim is also the largest against Switzerland in treaty arbitration to date, Drew and Napier said in its February statement.

The Straits Times has contacted the law firm for comment on how this development might impact the case.

The wipe-out of AT1 bonds amid the rescue of Credit Suisse was a highly controversial part of the Swiss government’s response to the crisis at its country’s second-largest bank, given that typically shareholders absorb losses before bond holders.

The government and regulator Finma contended at the time that investors should have known about the conditions contained in the bonds’ fine print.

Mr Thomas Werlen, Quinn Emanuel’s lead Swiss lawyer who represented some of the biggest bond holders 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 declined to comment. Its shares fell in Zurich after the news.

Prices on claims tied to the AT1 bonds have risen 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 wipe-out, 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 ever regain their status as securities.

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

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 from Finma, the SNB and the Swiss government. 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 bond holders’ 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”. BLOOMBERG