Some investors doubt the legality of Credit Suisse subordinated bond write-downs (AT1) and are considering legal action. For this reason, the Swiss Financial Market Supervisory Authority (FINMA) said in a statement on Thursday that the order to write down the AT1 bonds in the amount of CHF 16 billion was covered by the contractual conditions in the Credit Suisse prospectuses.
Markus Frühauf
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The write-down on the financial market causes confusion because it is a Swiss peculiarity. This is because the holders of AT1 subordinated bonds will be held liable for losses, while Credit Suisse shareholders will receive CHF 3.2 billion in shares of the acquiring UBS. In other jurisdictions, such as the EU, AT1 securities can only be used to cover losses after the shares. On Monday, EU banking supervisors had to point out that this hierarchy has not changed.
Higher default risk, higher interest rate
The abbreviation AT1 stands for "Additional Tier 1", which can be translated as "additional capital of the first subordination level". Compared to ordinary (senior) bonds, these securities carry a higher default risk and therefore bear higher interest rates. An AT1 bond with an interest coupon of 10 percent is outstanding from Deutsche Bank.
The Swiss supervisors justify their order primarily with Credit Suisse's contractual AT1 conditions. According to them, the 'granting of extraordinary State support' is mentioned as a triggering event for full depreciation. This condition was fulfilled with the use of extraordinary liquidity assistance loans with a default guarantee from the Federal Government last Sunday. The acquisition of Credit Suisse by UBS is supported by liquidity assistance of more than CHF 200 billion.
Dangerous crisis of confidence
The bailout followed the severe turbulence of Credit Suisse shares last week. The price had crashed at times by 30 percent. Thus, the withdrawal of deposits by insecure customers resumed. In the fourth quarter alone, 110 billion francs had already been withdrawn from the bank. The crisis of confidence threatened to put the bank in trouble.
In addition to the contractual conditions, the Swiss supervisors cite the Bernese government's emergency decree on federal guarantees for liquidity assistance as a further reason. This authorises the depreciation of core capital to be ordered. "Based on the contractual basis and the emergency ordinance, Finma has instructed Credit Suisse to write off the AT1 bonds," Finma said.