David Tepper, distressed asset investor, says he trusts in European debt issuanceInvestors in distressed US debt and corporate litigators are planning to sue the Swiss government for its decision to write $17bn Credit Suisse bonds. This was part of UBS’s shotgun marriage.
The government of Switzerland caused a stir among bond investors by using an emergency ordinance to reduce the bonds to zero. However, it also negotiated a deal in which UBS will pay shareholders $3.25bn.
AT1s is a type of debt that can be used to absorb losses when institutions are in trouble, but they are generally considered to be more valuable than equity on the balance sheets.
David Tepper, the billionaire founder and CEO of Appaloosa Management, said, “If this is left standing, how can you trust any Swiss debt security? Or for that matter, wider Europe?” “Contracts should be honored.”
Tepper is one of the most successful investors in troubled financial businesses. He famously made billions of dollars betting that the US would not nationalize its banks during the financial crisis. Appaloosa purchased a variety of Credit Suisse’s junior and senior debts as the bank fell into chaos.
Chief investment officer at RBC BlueBay Mark Dowding said that Switzerland looked “more like a banana republic”. His Financial Capital Bond fund has fallen 12.2 percent this month.
In preparation for the legal battle, some funds have bought exposure to the debt. Goldman Sachs, one of the banks that facilitate claims trading, has offered prices at single digit cents per dollar.
Quinn Emanuel Urquhart & Sullivan, and Pallas Partners are two of the law firms that represent bondholders. Quinn hosted a conference call Wednesday attended by over 750 people.
Richard East, Quinn partner, stated that the deal was “a resolution disguised up as a merger”. He pointed to 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 in a resolution [they] would be respecting ordinary priorities.”
According to the firm’s lawyers, Quinn is considering lawsuits in several countries. There are potential avenues for Quinn to challenge Finma’s actions on the grounds of investor property rights violations or an arbitrarily exercised discretion.
Credit Suisse is being investigated for any mis-selling of statements to investors. This includes a March investor presentation.
On Wednesday afternoon, Pallas Partners held a conference call with potential clients. Natasha Harrison is the founding partner of the firm. She stated that there was “a very strong argument” that Credit Suisse has made misrepresentations about its financial safety as recently as March 14.
Credit Suisse’s AT1 bonds plunged last week after its largest investor ruled it out of providing additional capital. Wealthy clients deposited SFr35bn.
Global distressed funds saw an opportunity to buy some of the most risky debt. They hoped that the government wouldn’t let its second-largest lender fail and would instead merge with UBS.
Credit Suisse’s AT1 Bonds warned that Swiss regulators could not follow “any order of priority”. However, analysts and investors have claimed that the contract conditions for writing down the bonds weren’t met.
AT1s are usually only activated if there is a “viability event”, which is defined in the prospectus to be when “customary measures” to increase the bank’s capital adequacy fail or the institution receives an “irrevocable commitment of extraordinary public support” to boost its capital level.
Last week, the Swiss government stated that it had a better legal basis to erase the bonds due to a law amendment.
Credit Suisse’s AT1 bonds are held by Pimco, Invesco and BlueBay. Legg Mason is one of the long-term holders.
According to a source familiar with the matter, Varde Partners, a well-known alternative credit investor based in Minnesota, held a small amount of AT1 bonds at the weekend’s fateful weekend.
Algebris Investments and Lazard have all been among the fund managers who have been hard hit by the wider sale-off in AT1 credit.
According to an iBoxx index, AT1s dropped as high as 19.5 percent in the month ending Monday. However, they have since gained some ground.
Lazard Capital Fi, which invests IN AT1s, Credit Suisse included, lost 9% Monday, bringing losses to 17.3% this month.