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© Reuters. FILE PHOTO: Logos of Swiss banks UBS and Credit Suisse are seen in Zurich, Switzerland March 20, 2023. REUTERS/Denis Balibouse/File Photo
By Naomi Rovnick, Chiara Elisei and Kirstin Ridley
LONDON (Reuters) – Credit Suisse bondholders are seeking legal advice after the Swiss regulator ordered 16 billion Swiss francs ($17.5 billion) of Additional Tier-1 (AT1) debt to be wiped out under its rescue takeover by UBS.
These higher-yielding junior bonds emerged from the 2008-2009 crisis as a way to boost bank capital while shifting the risk of losses to investors and away from taxpayers.
Lawyers and dealmakers said the AT1s, which have dropped in value to just a few cents in the dollar following the move, are being traded by hedge funds in a so-called litigation play.
Here’s a look at the potential for litigation.
WHY IS THIS A BIG DEAL?
The Swiss regulator’s decision inverted the long-established seniority of bondholders over shareholders over the assets of a company in distress. Not only did bondholders expect protection, but UBS is paying $3.23 billion to Credit Suisse shareholders.
This angered some investors and has prompted lawyers to start investigating potential litigation.
Other AT1 bonds fell in price on Monday on fears about the prospect of losses should other banks get into difficulty.
The bonds in the $275 billion market are designed to be shock absorbers if a bank’s capital levels fall below a threshold. They are then converted into equity or written off.
WHO IS INVOLVED?
Law firms including Quinn Emanuel Urquhart & Sullivan, Pallas Partners and Korein Tillery say they are speaking to prospective bondholder clients about bringing claims.
In a call on Wednesday, which drew more than 750 attendees, Quinn Emanuel raised the prospect of pursuing claims in Switzerland and elsewhere, sources with knowledge of the matter told Reuters.
One Paris-based manager of a debt fund that held Credit Suisse AT1s said he had been “spammed” with emails from lawyers.
IS THERE AN OPPORTUNITY?
Some distressed debt-type funds have been buying Credit Suisse’s AT1s for a few cents on the dollar. The bonds were traditionally held by institutional investors.
Samuel Norris, special situations partner at law firm Ropes & Gray in London, said he had been instructed by a number of hedge funds interested in trading the debt on the back of litigation news.
But five European and UK-based asset managers, identified by fund tracker Morningstar as among the…
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