The $ 3.2 billion deal between UBS and Credit Suisse might lead to lawsuits. CNBC reported that many Credit Suisse bondholders said they might take legal action after $ 17 billion of the bank’s additional tier-one bonds were wiped out. Also, shareholders in the bank were forced to see massive losses, as some analysts had already anticipated.
FINMA said on Sunday that the AT1s, regarded as risky investments, shall be written down to zero. The stock investors shall receive payouts as a part of the takeover. This majorly angered bondholders.
David Benamou (chief investment officer of Axiom Alternative Investments) is a holder of AT1 bonds at the Credit Suisse Bank. He said to CNBC news on Tuesday that he will be joining the lawsuit along with most bondholders.
What Quinn Emanuel Urquhart & Sullivan commented
The famous law firm, Quinn Emanuel Urquhart & Sullivan, has put together one multi-jurisdictional lawyer’s team from the U.K., Switzerland, and the U.S.
The firm said that the team is in discussions with the holders of Credit Suisse Bank’s AT1 capital instruments, representing a percentage of the total notional value of AT1 instruments that Credit Suisse Bank issued. This may lead to legal actions that can be available to them after the announcement of the merging between Credit Suisse and UBS.
Previously, the firm had represented bondholders after Banco Popular’s (Spanish bank) sale happened to Banco Santander in 2017. This also saw AT1s written down to zero.
The firm said it plans to bring a call for bondholders on Wednesday. Here, they shall talk about the potential avenues of redress.
The Current Scenario
The demise of the 166-year-old banking institution sent shockwaves throughout European finance. The downfall rattled the money managers in the world of bank capital. They are now determining where they stand in the investor claims scenario.
One of the major annoyances for the holders of the notes was that they were placed behind equity holders. Some European regulators also agree with them.
In the meantime, the financial regulator FINMA ordered the write-down of tier 1 bonds.
The sudden action can form the basis of lawsuits by the holders of the notes.
FINMA’s decision to wipe out Credit Suisse Bank’s AT1s before writing off the equity can have far-reaching consequences as to how banks shall raise capital.
All the circumstances in the finance sector that have happened so far can affect the market adversely.
Jon Peace, a Credit Suisse banking analyst, commented that,
“A likely development is the cost of issuing such bonds will increase to reflect increased perceived default risk,”
This is more true for Swiss banks because its AT1 bonds were introduced after the 2008 financial crisis as an alternative source of bank funding. And it has language in its terms that allows for a permanent write-down.
As Bloomberg analysis show, UBS, in this condition, is more reliant for its capital on risky bonds, rather than any other major lender in Europe.
AT1 prices tumbled on Monday. But, the prices partially rebounded on Tuesday.