Credit Suisse: Asia investors sue Switzerland over bank collapse

BBC News:

Asian investors have joined a series of landmark international lawsuits being filed against the Swiss government over its handling of the takeover of troubled bank Credit Suisse.

In March, Swiss authorities forced Credit Suisse to merge with larger rival UBS amid fears it could collapse.

The move rendered worthless $17bn (£13.5bn) of bonds held by investors.

“Everything unravelled so quickly,” said one bondholder in Singapore who spoke to the BBC anonymously.

Already a Credit Suisse client for several years, he bought around $500,000 worth of bonds in January despite the bank having been hit by a series of scandals and compliance problems over the past few years.

“Whenever I spoke to them, the bank gave me constant reassurances that this was just a blip, so I decided to go for it. It didn’t feel like I was gambling.”

Companies sell bonds to investors to raise the funds they need, paying the money back over time with a premium.

The type of bonds he bought from Credit Suisse are known as AT1 bonds, or contingent convertibles. They normally carry high yields for investors but are considered among the riskiest bonds that banks issue.

Investors know that in dire circumstances this type of debt can be written down to zero, which is exactly what happened when UBS was told to take over Credit Suisse.

The Swiss financial regulator, Finma, has not commented directly on the lawsuit but in March said “the contractual conditions” for a write down were met.

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AT1 bonds, they said, can be wiped out in a so-called “Viability Event” – in this case the extraordinary liquidity support granted by the Swiss government to Credit Suisse on 19 March.

Nevertheless, dozens of individual bondholders in Singapore have joined what is believed to be thousands of aggrieved retail investors globally, who are challenging the Swiss authorities in court. Lawyers say they have been inundated with enquiries.

The bondholders’ main grievance is the manner in which the merger was conducted.

Central to their claim is who was given priority when the bank failed. The terms of the bonds, seen by the BBC, show that bondholders are, if possible, supposed to be compensated first, after which come shareholders.

But in practice, shareholders were allowed to exchange their Credit Suisse shares for UBS shares, albeit at a vastly reduced value.

It means, in effect, that those who had bought shares got something, while those who had bought bonds got nothing.

The legal firm representingbondholders has called the Swiss regulator’s decision “an unlawful action” that has had “devastating consequences on thousands of retail and small investors globally.”

“In simple terms, bondholders were deprived entirely of the value of their bonds through a series of irregular administrative acts,” said Epaminontas Triantafilou from law firm Quinn Emanuel.

Another Asia-based bondholder who spoke to the BBC said he and his wife, who were due to retire this year, had their life savings wiped out by the decision.

“We’re losing sleep over this. It should have been a rock solid investment, but now I think the reputation of Switzerland and Swiss banks has gone down the tube,” he said.