Credit Suisse privately challenges FINMA’s AT1 writedown

Credit Suisse directly disputed the Swiss financial regulator’s write-down of $17bn of its Additional Tier 1 bonds in a private letter, with the aim of reducing employee bonuses linked to the debt.

Investors representing at least $4.5 billion of expired Credit Suisse AT1 bonds filed a lawsuit last month against FINMA, which the Swiss regulator imposed two months ago as part of the bank’s shotgun wedding with UBS. A demand was made to cancel the holding.

Earlier this month aggrieved bondholders forced FINMA to hand over to Credit Suisse a decree issued on March 19 – the day the UBS merger took place – ordering the bank to write down AT1 bonds.

The decree explained that the regulator believed a “viability event” – a term in the contract requiring a writedown – was triggered because the government-backed liquidity facilities also boosted the bank’s capital.

However, the bondholders also forced FINMA to hand over a subsequent decree issued on March 22 that clarified 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 stating that the terms of the contract were not met for the writedown, adding that: “(Credit Suisse Group) further argues that no contractual ‘viability event’ occurred as there was no state support capitalization effect.”

Thomas Verlaine, a partner at Quinn Emanuel who is leading the litigation against FINMA, described the language as “quite stark” and said the document was “even more helpful” to bondholders than the earlier decree.

“Both sides of the contract say the same thing: the drafter and the reader – ie Credit Suisse and the investor – are in agreement,” he said. “Only a third party – FINMA – interpreted it differently.”

The purpose of the letter was to give up the so-called “contingent capital award” of senior bankers at Credit Suisse, a portion of their bonuses that was linked to AT1s. Credit Suisse “advised against” FINMA ordering the writedown of CCA in its letter, but the regulator disagreed and replied that AT1-linked instruments were also covered by its earlier decree.

AT1 is a type of hybrid debt instrument that was created after the 2008 financial crash to give banks greater capital flexibility in the event of a crisis.

The second decree was published online in full last week 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 sheds fresh light on why the Swiss government found it necessary to pass an emergency ordinance over the weekend, giving FINMA the ability to order Credit Suisse to underwrite the bonds. People close to the litigation noted that this may have been necessary because the Swiss bank did not agree with FINMA’s interpretation of the contracts.

The FT reported earlier on Monday that Credit Suisse employees are preparing to sue the Swiss financial regulator over bonuses worth more than $400 million in former CCAs that were scrapped after the bank was rescued by UBS.