Swiss regulator defends $17bn bond wipeout

By Mark McSherry

Switzerland’s financial market regulator FINMA has defended its decision to impose huge losses on some of Credit Suisse bondholders — arguing that the decision was legally watertight.

Switzerland announced a multi-billion franc rescue of Credit Suisse on Sunday, which will see the bank taken over by UBS.

However, as part of that deal, the Swiss regulator said 16 billion Swiss francs ($17.49 billion) of Credit Suisse’s Additional Tier 1 debt would be written down to zero, while shareholders received some compensation.

That decision to prioritised shareholders over AT1 bondholders shocked the $275 billion AT1 bond market and some Credit Suisse AT1 bondholders are seeking legal advice.

In a statement, FINMA said: “The Swiss Financial Market Supervisory Authority FINMA hereby explains the basis for the complete write-down of the nominal value of AT1 capital instruments issued by Credit Suisse.

“For this, FINMA relies on the issuance prospectuses for the bonds and the Federal Council’s Emergency Ordinance.

“Due to numerous enquiries about Credit Suisse’s capital instruments, so-called AT1 bonds, FINMA is providing information about the basis for writing down these instruments.

“FINMA has instructed Credit Suisse to completely write down its AT1 instruments and to inform the bondholders concerned without delay. Tier 2 bonds are not written down. Questions regarding individual bonds should be addressed to the issuers of the capital instruments …

“The AT1 instruments issued by Credit Suisse contractually provide that they will be completely written down in a ‘Viability Event’, in particular if extraordinary government support is granted. 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 …

“On 19 March 2023, the Federal Council enacted the Emergency Ordinance on Additional Liquidity Assistance Loans and the Granting of Federal Default Guarantees for Liquidity Assistance Loans by the Swiss National Bank to Systemically Important Banks. The Ordinance also authorises FINMA to order the borrower and the financial group to write down Additional Tier 1 capital.

“Based on the contractual agreements and the Emergency Ordinance, FINMA instructed Credit Suisse to write down the AT1 bonds …

“AT1 instruments in Switzerland are designed in such a way that they are written down or converted into Common Equity Tier 1 capital before the equity capital of the bank concerned is completely used up or written down. The instruments publicly issued by large banks are mainly held by institutional investors due to their risk profile and large denominations.”

FINMA CEO Urban Angehrn: “On Sunday, a solution could be found to protect clients, the financial centre and the markets. In this context, it is important that CS’s banking business continues to function smoothly and without interruption. That is now the case.”