The lawsuits over UBS’s ‘shotgun wedding’ rescue of Credit Suisse are growing in number.
US law firm Quinn Emanuel Urquhart & Sullivan has already been instructed by key holders of Credit Suisse’s ‘additional tier one’ (AT1) capital instruments to represent them in discussions with the Swiss authorities and in any possible litigation.
Now, however, it appears that FINMA, the Swiss Financial Market Supervisory Authority, has been served with a lawsuit from investors who had CHF4.5bn (€4.5gbn) invested in the bank’s bonds. According to the law firm, this move is the first in seeking redress for what it argued was the unlawful deprivation of the claimants’ property rights.
As CNN wrote: “It is the first major lawsuit in the public domain to be filed over Switzerland’s decision to wipe out around $18bn [€16.3bn] of Credit Suisse’s AT1 debt during the CHF3bn all-share rescue deal last month, which stunned markets and alerted litigators. The appeal against FINMA, the Swiss Financial Market Supervisory Authority, which ordered the writedown, was filed on 18 April in the Federal Administrative Court in St Gallen, north-east Switzerland.”
Issue of protection
Commentators acknowledge the lawsuit has the potential to get messy. As Reuters put it: “AT1 bonds totalling 16bn Swiss francs were wiped out last month during the state-backed rescue of Credit Suisse by its Swiss rival UBS, angering bondholders who thought they would be better protected than shareholders.”
Credit Suisse was forced under UBS’s umbrella last month in a deal likened to a ‘shotgun wedding’. As Expert Investor wrote then, under the terms of the deal, the cumulative financial risk the general public is shouldering to save Credit Suisse is set to reach CHF209bn – CHF100bn from the Swiss National Bank for Credit Suisse and UBS, another CHF100bn for Credit Suisse, and then another CHF9bn for UBS as insurance in the event the bank sees large losses on certain assets during the takeover.
Within a week, though, there were murmurs the AT1 bondholders would eventually become a thorn in the side of the deal. At the time, Expert Investor suggested the move had rattled some cages, with legal challenges already being considered.
And, as Dominique Laboureix, chair of the European Union’s Single Resolution Board, told CNBC at the time: “As a resolution authority in charge of the banking union resolution framework, I can tell you that I will respect fully and entirely the legal framework. So in resolution, when adopting a resolution scheme, I will respect this hierarchy starting by absorbing equity stack, and then the AT1 and then the Tier 2 and then the rest.”