Chasing waterfalls: FINMA defends $17B write-down of Credit Suisse AT1 bonds

Swiss financial regulator FINMA has issued a defense of its decision to wipe out holders of Credit Suisse's additional tier one bonds as part of the state-led sale of the beleaguered lender to rival UBS, which has prompted an outcry from investors as well as special statements from other global regulators.

In a statement published March 23, FINMA — the Swiss government body responsible for financial regulation — defended its decision to write-down roughly $17 billion of Credit Suisse AT1 bonds, based on its view that the sale to UBS was a “viability event” due to the “extraordinary government support” provided to Credit Suisse.

“As Credit Suisse was granted extraordinary liquidity assistance loans secured by a federal default guarantee on 19 March 2023, these contractual conditions were met for the AT1 instruments issued by the bank,” FINMA said.

Credit Suisse was sold to UBS in a hurried deal over the March 18-19 weekend which marked the most high-profile failure of a globally important bank since the Global Financial Crisis. As part of the transaction, Credit Suisse shareholders received roughly CHF3.25 billion in UBS shares, but AT1 bondholders were wiped out at the direction of FINMA.

Liquidity event
AT1s emerged from the GFC and sit below other unsecured and subordinated debt, but above common equity in the payment waterfall. The bonds can either be converted into equity if a bank's common equity tier ratio falls below a trigger level outlined in the bond documentation, or written down to zero once equity holders have been wiped out.

FINMA however took the controversial decision to write-down the Credit Suisse AT1 bonds to zero while not imposing full losses on equity holders, based on its reasoning that liquidity provided to Credit Suisse by the Swiss National Bank met the so-called “liquidity event,” which under terms of the bond documentation allowed AT1 holders to be wiped out.

However, some analysts have already cast doubt on FINMA's justification of a liquidity event, based on the degree of state support granted to Credit Suisse. JP Morgan analysts led by Roberto Henriques, for example, in a March 21 note argued that the $54 billion liquidity line provided to Credit Suisse by the Swiss National Bank did not constitute a liquidity event. The JP Morgan analysts said the $54 billion lifeline provided to the stricken lender in the early hours of March 16 did not at the time trigger a write-down of the Credit Suisse AT1s. “Further, we note that this support did not improve the issuer’s capital adequacy, which for us is the critical point,” Henriques wrote.

Zero hour
The write-down to zero will affect roughly $17 billion of Credit Suisse AT1 bonds across 13 tranches denominated in US dollars, Swiss Francs and Singapore dollars. Credit Suisse AT1s fell to as low as one cent on the dollar on Monday, while AT1 bonds issued by other European banks fell by up to 15 points on fears of wider contagion following the Swiss regulator's decision.

Indeed, the collapse in AT1 prices following the move prompted EU regulators and the Bank of England to both assert in statements on March 20 that shareholders should bear losses before bondholders, while Singapore’s monetary authority in a March 22 announcement echoed a similar sentiment for AT1s issued by lenders in that country.

FINMA's defense of its decision today is unlikely to put an end to what could be years of litigation, however, as AT1 holders prepare legal action against the Swiss authorities, with law firm Quinn Emanuel Urquhart & Sullivan, for example, assembling a team on March 20 to assess bondholder claims following the UBS takeover, ahead of a meeting held on March 22.

According to Morningstar, Swiss asset manager Gam is the fund most exposed to Credit Suisse AT1s, while in the European high-yield market, Nordea’s European High Yield Bond fund had roughly 2% exposure at the end of January.

Credit Suisse AT1 bonds rose to around five cents on reports of bondholder litigation, and are today quoted in a 5.25/6.00 market, according to Refinitiv prices.

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