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AT1 bonds worth CHF 16 Billion written-down with a 2-sentence explanation. What you need to know.
Last weekend brought significant changes to the Swiss economy. The Federal Council, the National Bank and FINMA sat together and brokered a merger agreement between Credit Suisse and UBS. Next to the merger, the Swiss national bank announced an additional credit line of CHF 200 billion for Credit Suisse, to stabilize the bank due to apparent liquidity issues.
This is unprecedented in recent Swiss history and has led to another piece of news almost being drowned out. On Sunday 19 March 2023 FINMA announced in a news publication that:
“The extraordinary government support will trigger a complete write-down of the nominal value of all AT1 debt of Credit Suisse in the amount of around CHF 16 billion, and thus an increase in core capital.”
Meaning that FINMA, via a publication on their website, casually declared the complete write-down of obligations worth CHF 16 billion.
In the FAQs, published on the same day, FINMA held that:
“A clear legal basis has been created for FINMA to write down part of Credit Suisse’s regulatory capital (private creditors are to contribute around CHF 16 billion to the risks).”
This news raised the just question if FINMA is competent to write-down bonds worth CHF 16 billion on a Sunday with a 2-sentence explanation. Especially considering that FINMA still announced on 15 March 2023 in itsmedia publication that Credit Suisse fulfills all regulatory liquidity requirements.
Legally, The AT1 instruments are generally mentioned in the Capital Adequacy Ordinance (“CAO”), according to Art. 18 para. 1 CAO, eligible equity consists of core capital (Tier 1 capital; T1) and supplementary capital (Tier 2 capital; T2). Core capital is composed of Common Equity Tier 1 (CET1) capital and additional Tier 1 (AT1) capital (Art. 18 para. 2 CAO). AT1 Bonds fall under the provisions of the so-called bail-in bonds, according to Art. 126a CAO. Among others, it is legally required that such bail-in bonds must contain a consent form stating that the creditor accepts and acknowledges that the claim may be written off by the supervision authority. According to Art. 29 para. 2 CAO, a write-down should occur at the latest before seeking public assistance or if FINMA so orders to avoid insolvency.
However, when it comes to determining details of the event which triggers the write-down (“Write-Down Event”), there are no further regulatory requirements and it is up to the parties to settle the specifics in the respective bond terms.
The respective terms and conditions of the CS AT1 bonds (publicly accessible) determine that Write-Down Events occur in the following instances:
- The Core Equity Ratio falls below 7 percent;
- The regulator deems that a write-down is necessary to save CS from becoming insolvent, bankrupt or unable to pay debts; or
- CS has received an irrevocable commitment of extraordinary support from the Public Sector with the effect of improving CSG`s capital adequacy and without which CS would have become insolvent, bankrupt or unable to pay its debts.
Furthermore, according to the bond terms, CSG must notify the bondholders no later than three days after the occurrence of such a Write-Down Event. The notice must contain information about the Write-Down Event itself and when the write-down shall take place. Logically, the notice must be given before a write-down can occur.
Whereas it is discussable if an actual Write-Down Event occurred and all conditions are met, it seems clear that the declaration of FINMA does not satisfy the requirements regarding giving notice. The bondholders were not warned before the actual write-down and the notice period of 3 days was disregarded. Furthermore, the info provided by FINMA was made without referencing any legal or contractual provision and with almost no information. Especially the fact that FINMA informed the bondholders on a Sunday of the write-down without any explanation on the said write-down must be seen as particularly critical considering that FINMA is a public institution and should respect the constitutional right to be heard. Moreover, this approach contrasts with the reassuring statements of FINMA on 15 March and with the principle according to Art. 19 CAO, that CET1 capital bears losses before AT1 capital.
We believe that the write-down procedure is flawed, whether it is sufficient to declare the write-down as invalid/void must be for the Swiss courts to decide.
If you would like to find out more about this topic or would like to request consultation, please contact us!
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