The AT1 bonds

Bondholders in their hundreds have been indicating their support, or authorising proceedings, in respect of the litigation concerning Credit Suisse Group’s (CSG) Additional Tier (AT) 1 capital bonds. The facts are well known – on 19 March 2023, the Federal Council of Switzerland enacted the Emergency Ordnance which authorised the Swiss regulator (FINMA) to order CSG to write down the AT1 bonds.This step had the effect of $17 billion worth of Credit Suisse AT1 bonds being wiped out. In these circumstances, litigation may have been inevitable.

As has been noted by many commentators, AT1 bonds contained clear trigger circumstances where they could, contractually and lawfully, be written down to zero.

Sample wording is as follows:

“the Regulator has notified CSG that it has determined that a write-down of the Notes…is, because customary measures to improve CSG’s capital adequacy are at the time inadequate or unfeasible, an essential requirement to prevent CSG from becoming insolvent, bankrupt or unable to pay a material part of its debts as they fall due, or from ceasing to carry on its business” (our emphasis)

The argument of the bondholders is going to have to be that FINMA was not entitled to come to the view that it could order the write-down of the AT1 bonds. The argument will have to establish that FINMA was not entitled to come to the conclusion that the write-down was an essential requirement to prevent the ceasing of CSG’s business. There may be contractual arguments as to whether the ceasing of business was an independent requirement or whether it was subsidiary to a finding of insolvency or an inability to pay debts. Expert evidence may be required as to whether CSG would have been able to carry on its business. It will be an expensive but essential counterfactual to prove.

A non-lawful order to write-down the AT1 bonds could likely be construed as an expropriation, so expect some investment arbitration claims alleging this breach of a disparate range of treaties. There will then be the familiar counter-arguments that Switzerland was entitled to act as it did in the public interest.

The litigation will run and run. Perhaps there are hopes that pressure from regulators around the world – who have come out and criticised the Swiss approach as it has favoured shareholders over bondholders – will lead to some kind of settlement. Given the quantum, that may be optimistic.

There are some claims that, bizarrely, appear too big and ugly to be funded and this claim has all the hallmarks of being an expensive and lengthy battle where the chances of success cannot immediately be demonstrated to the level that many funders would feel are necessary. It is never an ideal start to have to interpret the key contract in a particular way whilst having to downplay an alternative argument suggesting that the precise events that occured were anticipated and accepted by the bondholders.