Holders of risky bonds were furious when UBS took over. Finma, the Swiss financial regulator, has defended its decision in Credit Suisse’s rescue deal to eliminate a large number of subordinated risky bonds.
This Sunday’s move rendered SFr16bn ($17bn worth) of investments unprofitable. It has been one of the most controversial aspects of the shotgun marriage between Credit Suisse, UBS and UBS, facilitated by Swiss authorities.
Several hours after the announcement, large market regulators started to distance themselves from this decision, fearing that it might affect banks’ future ability to raise capital.
Enraged bondholders have promised to sue Finma and the Swiss government over the matter.
Finma stated that it had fulfilled all legal and contractual obligations to take unilateral action in light of the urgent situation.
Urban Angehrn, Finma’s chief executive, stated that a solution was found on Sunday to protect clients, financial centres and the markets. “In this environment, it is crucial that Credit Suisse’s bank business continues to operate smoothly and uninterrupted.”
Thomas Jordan, chair of Swiss National Bank, stated that UBS was the only option for Credit Suisse. He also said that a government takeover and stabilisation would have put the bank at risk of a systemic crisis.
Jordan stated that although resolution is theoretically possible in normal circumstances, we were living in extremely fragile conditions with high levels of nervousness on the financial markets. “A resolution in these circumstances would have caused a larger financial crisis not only in Switzerland, but worldwide.
“[It] wouldn’t have helped to stabilize the situation, but it created immense uncertainty. . . We knew we had to avoid it, if possible.
The controversy centred on the decision of the regulator, in collaboration with the SNB & Swiss ministry of finance, to preserve some value to Credit Suisse shareholders. These would nominally be subordinated any bondholders in capital structure.
Credit Suisse shares will be purchased by UBS at SFr3.25bn
Finma stated that the additional Tier 1 (AT1) bonds were written in explicit contractual language, stating that they would be “completely wrote down in a viability event” in particular if exceptional government support is granted. This allowed Finma to prioritize equity holders over AT1 holders.
AT1s are a hybrid debt instrument that banks can use to provide greater capital flexibility in times of crisis.
UBS will provide SFr9bn in government guarantees to the bank and a SFr100bn liquidity guarantee from the SNB as part of the acquisition.
Finma reported that a second emergency government ordinance was issued by Bern on Sunday. It confirmed the authority to make decisions about elements of a bank’s capital structure under Swiss law.
It stated that “[the] Swiss instruments are designed so that they can be written down or converted to [equity] before any equity capital of the bank is used up or written down.” The bonds were intended for sophisticated institutional investors due to their risky hybrid nature.
Pallas Partners and Quinn Emanuel Urquhart & Sullivan are two of the law firms that represent bondholders who have pledged to fight against the Swiss decision.
Quinn hosted a conference call Wednesday that was attended by over 750 people.
Richard East, Partner, stated that the deal was “a resolution disguised up as a merger”. He pointed out statements made by the European Central Bank (ECB) and the Bank of England which disassociated themselves from the Swiss approach.
He said, “You can tell something is wrong when other regulators arrive and politely point to the fact that they would have followed ordinary priorities in a resolution.”