Credit Suisse directly disputed the Swiss financial regulator’s basis for writing down $17bn of its additional tier 1 bonds, in a private letter aimed at sparing staff bonuses that were tied to the debt.
Investors representing at least $4.5bn of wiped-out Credit Suisse AT1 bonds filed a lawsuit against Finma last month, seeking to overturn the Swiss regulator’s cancellation of their holdings that was imposed as part of the bank’s shotgun marriage to UBS two months ago.
The aggrieved bondholders earlier this month forced Finma to hand over a decree it had issued to Credit Suisse on March 19 — the day the UBS merger was struck — ordering the bank to write down the AT1 bonds.
The decree made clear that the regulator believed a “viability event” — a term in the contract requiring a writedown — had been triggered because government-backed liquidity facilities had also bolstered the bank’s capital.
However, bondholders also compelled Finma to hand over a subsequent decree issued on March 22 that makes clear that Credit Suisse disagreed with this interpretation of the contracts.
The second decree refers to a letter Credit Suisse sent to Finma on March 20 arguing that the contractual conditions had not been met for a writedown, stating: “[Credit Suisse Group] further argues that no contractual ‘viability event’ occurred because the state support did not have a capitalising effect.”
Thomas Werlen, a partner at Quinn Emanuel leading the litigation against Finma, described the language as “quite stark” and said the document was “even more helpful” to bondholders’ cause than the earlier decree.
“Both sides of the contract say the same thing: the drafter and the reader — i.e. Credit Suisse and the investors — are in agreement,” he added. “Only a third party — Finma — interpreted it differently.”
This letter was aimed at sparing Credit Suisse’s senior bankers’ so-called “contingent capital awards”, a portion of their bonuses that were linked to the AT1s. Credit Suisse “advised against” Finma ordering a writedown of the CCAs in its letter, but the regulator disagreed and responded that the AT1-linked instruments were also covered by its earlier decree.
AT1s are a type of hybrid debt instrument created after the financial crash of 2008 to give banks greater capital flexibility in the event of crises.
The second decree was published in full online last week by Antigua News, a local news outlet. The Financial Times separately obtained a copy of the decree and verified its authenticity with several people with direct knowledge of the situation.
Credit Suisse and Finma declined to comment.
The document also casts fresh light on why the Swiss government felt it necessary to pass an emergency ordinance over the weekend giving Finma the ability to order Credit Suisse to write down the bonds. People close to the litigation noted that this may have been required because the Swiss bank did not agree with Finma’s interpretation of the contracts.
The FT reported earlier on Monday that Credit Suisse staff are making preparations to sue the Swiss financial regulator over $400mn of bonuses in the former CCAs that were cancelled following the bank’s rescue by UBS.