Bond investors will sue the Swiss government after Finma (Switzerland’s Financial Market Supervisory Authority) brokered the merger between Credit Suisse and UBS and ordered that US$17 billion of Additional Tier 1 (AT1) bonds be reduced to zero, the Financial Times reports.
AT1 is a type of credit facility standard in Europe designed to assume losses and protect taxpayers when financial institutions face problems.
In crisis scenarios, they can be converted into equity or eliminated, as happened in the case of Credit Suisse.
Created in the 2008 global crisis, this type of investment is potentially risky because taxpayers pay high fees but are the last to be protected if the bank goes bankrupt.
These investors, however, still have priority over shareholders.
The rules for investments in AT1-type bonds set by Credit Suisse state that Swiss regulators “may not be required to follow any order of priority.”
Finma’s decision, however, was not well accepted by investors.
They claim the contractual conditions for liquidating the bonds have not been met.
According to the Financial Times, some investors intend to challenge Finma’s actions on the grounds of violation of investors’ property rights or an “arbitrary exercise of discretion.”
Investors are also looking into the possibility of Credit Suisse being held liable for misselling statements made to investors, including in an investor presentation made in March 2023.
UNDERSTAND THE CASE
On March 14, 2023, Credit Suisse Group AG reported identifying “material weaknesses” in its financial reports for the past two years.
The announcement was made in the 2022 annual report.
The other day, March 15, 2023, the bank’s shares fell as much as 30.8% at the day’s low, pulling the global banking sector down.
In Brazil, the five major financial institutions on the B3 (São Paulo Stock Exchange) lost R$35.7 billion in market value in 4 trading sessions from March 8 to 14.
Hours later, the Financial Times reported that the investment bank executives held meetings with representatives of the Swiss Central Bank and Finma.
According to the newspaper, Credit Suisse asked the monetary authorities for a public statement of support.
The Swiss Central Bank later said it would provide Credit Suisse with liquidity support.
The statements were made in a joint announcement with Finma.
“Credit Suisse meets capital and liquidity requirements imposed on systemically important banks. If necessary, the SNB [Swiss National Bank] will provide CS [Credit Suisse] with liquidity,” the note said.
In response, Credit Suisse announced that it would borrow US$54 billion from the Swiss Central Bank through a covered loan facility and a short-term liquidity line.
On March 16, 2023, Credit Suisse shares rose 19.15% on the announcement of the liquidity injection.
The rise came one day after a sharp drop of 24.11%.
On the same day, Reuters news agency reported that US shareholders of Credit Suisse sued the Swiss investment bank.
They claim that the bank defrauded them by withholding information about their finances.
The lawsuit was filed in a federal court in Camden, New Jersey.
Credit Suisse CEO Ulrich Koerner and Chairman Axel Lehmann are among the defendants.
On Monday (March 20), Reuters reported that the Swiss government and central bank are expected to make more than US$280 billion available to banks Credit Suisse and UBS to protect the country from possible global market turbulence.
On Monday (March 20), bond investors lost at least US$17.3 billion as the sale of Credit Suisse to rival UBS led to a drop in the value of the Swiss bank’s bonds.
In a statement, Finma said, “the extraordinary government support will trigger a total reduction in the nominal value of all Credit Suisse AT1 debt amounting to some SFr16 billion and therefore an increase in core capital.
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With information from Poder360