By Dave Graham, John Revill, and Oliver Hirt
ZURICH (Reuters) – A Swiss court announced on Tuesday that the decision to write off 16.5 billion Swiss francs ($20.53 billion) in bonds from Credit Suisse was unlawful, igniting renewed hopes for bondholders wanting to recover their losses and raising critical questions regarding the authorities’ management of the bank’s bailout.
The Swiss Financial Market Supervisory Authority (FINMA) faced backlash after its March 2023 decision to invalidate Credit Suisse’s Additional Tier 1 (AT1) bonds during the orchestrated takeover by UBS, leading to various legal disputes.
In reaction to the ruling, UBS shares plummeted by more than 3.5%, as the outcome could be appealable to Switzerland’s highest court.
Experts indicated that the ruling from the Federal Administrative Court is likely to be contested, and even if bondholders pursue legal action, full recovery of their original investments is not assured due to the bonds’ diminished value prior to Credit Suisse’s demise.
“In the event that an appeal does not succeed, the total repayment could be significantly less than the full 16 billion, since the market value of the bonds was considerably below their face value during the rescue,” commented Hans Gersbach, a professor specializing in banking and economics at ETH Zurich.
Peter V Kunz, a business law expert at the University of Bern, predicted that the legal process could stretch over six years and might culminate in the need to reissue the bonds.
Nonetheless, Kunz pointed out that the complications faced by UBS due to the actions of Swiss authorities could potentially garner the bank some support in its pursuit of reduced capital regulations.
Should UBS be required to reinstate the AT1 bonds, it might consider requesting the government to share the financial burden, Kunz added.
The court’s partial ruling determined that the 2023 AT1 bond write-off was not legally justified.
“The interference with bondholders’ property rights was significant enough to necessitate a clear and formal legal foundation, which was not present,” the court stated.
AT1 bonds are hybrid financial instruments devised post-2008 financial crisis, used by banks to reinforce their capital reserves and to absorb losses during challenging times.
Both the Swiss finance ministry and FINMA acknowledged that they would review the court’s ruling. UBS opted not to comment.
2023 DECISION LEFT MARKETS STUNNED
The decision to write off bonds in 2023 took markets by surprise, as it prioritized shareholder interests over those of bondholders, disrupting the traditional hierarchy of capital structure.
