Bondholders sue Switzerland in US over Credit Suisse AT1 bonds
A group of investors in Credit Suisse Group AG bonds that got wiped out when UBS Group AG rescued the bank in a Swiss government-brokered deal are suing the European country in a US court.
The lawsuit, filed Thursday in federal court in New York, seeks more than $82 million plus interest and is the latest legal fight taking place in the US and Europe related to the bond write-down.
Holders of Credit Suisse’s additional tier 1 bonds effectively saw about $17 billion of their notes written down to zero after the sale. Meanwhile, the bank’s common shareholders were paid billions of francs when Credit Suisse was sold to UBS, a move that many investors saw as upending a capital markets convention that stockholders are the first to absorb losses.
Switzerland’s direction to write down the value of the AT1s to zero as part of the sale of Credit Suisse to UBS was “an unlawful encroachment on plaintiffs’ property rights,” lawyers at Quinn Emanuel Urquhart & Sullivan, which are representing the bondholders, wrote in the complaint.
More than 100 claims have been filed by Credit Suisse AT1 bondholders challenging the complete write-down, according to Bloomberg Intelligence.
“We generally think bondholders face headwinds in these cases given the language of the bond documentation,” BI litigation analyst Elliott Stein said. “And in this case, the Swiss government will also likely have sovereign immunity and forum non-conveniens arguments.”
Bounce Back
The lawsuit in New York comes at a time when investors, in a rush to lock in higher yields before the Federal Reserve starts cutting rates potentially later this year, are willing to buy riskier credit. Bond titans, including Pacific Investment Management Co., Invesco Ltd. and JPMorgan Asset Management, have been loading up on the bonds lately.
Bondholders are also betting that any potential slowdown of economic growth won’t be severe, and the global banking industry is in a much better position.
AT1s, a type of contingent convertible bond, were introduced after the financial crisis to ensure bondholders take losses first when a bank is in trouble while taxpayers are off the hook. The market shut down for months following the historic Credit Suisse writedown.
The case is Creditincome Ltd. v. The Swiss Confederation, 24-cv-04316, U.S. District Court, Southern District of New York.
