Credit Suisse AT1 bondholders force Swiss regulator to publish wipeout decree
Bondholders burnt by the wipeout of Credit Suisse’s AT1 bonds have secured a small victory after forcing Switzerland’s financial watchdog to reveal the justification for its decision.
When UBS acquired Credit Suisse, holders of Credit Suisse’s AT1 bonds were controversially wiped out on the orders of Finma, the Swiss financial markets regulator. An AT1 bond – also know as a CoCo bond – is converted into equity if a bank falls below a certain, pre-decided strength.
Finma did not publish the decree ordering the writedown, leaving it unclear precisely why the decision was taken.
However, according to the Financial Times, last week Finma was ordered to hand over the decree giving the bondholders firmer ground to fight against the decision.
The investors making the case against Finma, making up $4.5bn of the bonds, argue that it acted unconstitutionally by cancelling a total of $17bn AT1 bonds while compensating shareholders. Bonds ordinarily take priority over equity.
The watchdog argues that conditions for the writedown were met because Credit Suisse drew on government-backed funding.
According to the Financial Times, Finma’s decree stated that the funding had “a direct positive effect on the liquidity and capital situation” of Credit Suisse, meaning it satisfied the so-called “viability event”. This enabled Finma to “write off the AT1 instruments on its own initiative.”
Investors suggest that with increased clarity over the decision, they will have a great ability to challenge it.
They argue that the conditions implied by Finma’s ruling are too broad and could trigger trouble in the broader AT1 market.
Finma declined to comment on the report.
Although the AT1 bondholders scored a small victory, holders of Credit Suisse’s credit default swaps (CDS) tied to the bonds will not get a payout after a decision from a committee specialising in derivatives disputes.
The Credit Derivatives Determinations Committee ruled on Wednesday that the wipeout of Credit Suisse’s AT1 bonds did not justify a payout.