The Swiss regulator's decision to prioritise shareholder value over certain bondholders in the forced takeover of Credit Suisse by UBS could result in legal action, a law firm has warned. Quinn Emanuel Urquhart & Sullivan said a call for so-called AT1 bondholders would likely be held on Wednesday.
Holdings worth over $17Bn were wiped out under terms of the merger with UBS, imposed by the Swiss financial watchdog FINMA during emergency talks last weekend. There is anger as those with AT1 bonds, who would expect to see losses, will get nothing but shareholders, who usually rank below bondholders in terms of who gets paid when a bank or company collapses, will receive $3.2 billion Swiss francs. Quinn Emanuel Urquhart & Sullivan are in discussions with a "significant percentage" of the Credit Suisse AT1 bondholders, with lawyers in Switzerland, the US and UK talking to a number of them about possible legal action.
The European Banking Authority, the European Central Bank and the European Union's Single Resolution Board said in a joint statement that they "welcome the comprehensive set of actions taken yesterday by the Swiss authorities in order to ensure financial stability." But the bloc's regulators said that the resolution framework established after the crisis of 2008 has set out the order in which shareholders and creditors of troubled banks should bear the brunt of the losses.
European regulators indicated uneasiness on Monday at the decision by their Swiss counterpart to allow Credit Suisse to write off 16 billion Swiss francs ($17.2 billion) in risky bonds as part of its $3.2 billion rescue deal from UBS, amid fears the step could send the wrong signal to bond markets.
In the UK the Bank of England has distanced itself from FINMA’s decision, stating that the U.K. “has a clear statutory order” detailing which shareholders and creditors were expected to take on losses. AT1 bonds “rank ahead” of equity investments, the statement noted, adding that they had followed this process in the unwinding of SVB UK.
The Swiss Financial Market Supervisory Authority said on Sunday that it will write down Credit Suisse's 16 billion francs of so-called Additional Tier 1 contingent convertible bonds, known as CoCos, to zero. The Swiss financial regulator, the country's federal department of finance and the Swiss National Bank have brokered a rescue deal in which UBS will buy the struggling investment bank after it suffered a year of heavy losses and rising legal bills.
"In particular, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 be required to be written down," the EU regulators said. "Additional Tier 1 is and, will remain, an important component of the capital structure of European banks."
On bankruptcy proceedings, bondholders are usually higher up the queue than shareholders, but under the AT1 bond contracts signed the same rules would appear not to apply, given Credit Suisse was facing a clear viability issue and had already been given support from the Swiss central bank.
Investors Considering Legal Action
Unsurprisingly some prominent Swiss investors will consider taking legal action against the takeover by UBS of Credit Suisse after shareholders were unable to vote on the deal, an investors' advocacy group said on Monday. The Ethos Foundation, which is based in Geneva and represents Swiss pension funds, said that "Faced with this unprecedented failure in the history of the Swiss financial centre, Ethos will continue to defend the interests of minority shareholders, starting with the Swiss pension funds. All options will be examined in the coming days, including legal ones, to determine the responsibilities of this debacle."
The group, which promotes best practice in corporate governance, said that pension funds which are Credit Suisse Group AG shareholders are being penalized by not being able to vote on the takeover at a general meeting.
An emergency ordinance means the deal does not need approval from shareholders, which is usually required under Swiss corporate governance rules. But the Ethos Foundation said this derogation will harm shareholders. Swiss pension funds will also face risks "related to a dominating position of a single large bank on the Swiss market," after the deal is completed, the group added.
The group, which has 246 members with 370 billion Swiss francs of assets under management, called for UBS to separate the Swiss banking division of Credit Suisse from the rest of the UBS Group.
The Ethos Foundation said it wants this unit to float because this "would preserve jobs and maintain a healthy competition, which would ensure the proper functioning of our economy."
Which investors are feeling the most pain from the $17Bn wiped out under terms of the merger with UBS will no doubt become clearer over the coming days. According to Morningstar data, funds managed by Lazard Freres Gestion, PIMCO and GAM Investments were among the most exposed as of the end of February to Credit Suisse AT1 debt in terms of portfolio weighting.
Today The Klein Law Firm announced a Lead Plaintiff Deadline of May 8, 2023 in the Class Action Filed on Behalf of Credit Suisse Group AG Shareholders. The class action complaint has been filed on behalf of shareholders of Credit Suisse Group AG (NYSE: CS) who purchased shares between March 10, 2022 and March 15, 2023. The action, which was filed in the United States District Court for the District of New Jersey, alleges that the Company violated federal securities laws.
The filed complaint alleges that Credit Suisse Group AG made materially false and/or misleading statements and/or failed to disclose that: (i) contrary to representations made in December 2022 by Credit Suisse's Chairman, Axel P. Lehmann, the sharp increase in customer outflows Credit Suisse began experiencing in October 2022 remained ongoing; (ii) accordingly, Credit Suisse had downplayed the impact of the Company's recent series of quarterly losses and risk and compliance failures on liquidity and its ability to retain client funds; (iii) as a result, Credit Suisse had overstated the Company's financial position and/or prospects; and (iv) as a result, the Company's public statements were materially false and misleading at all relevant times.
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