The Swiss authorities' 2023 decision to write off 16.5 billion Swiss francs ($20.53 billion) in Credit Suisse bonds was unlawful, a court said today, raising fresh questions about how the bank's rescue and subsequent takeover by UBS was handled.
The March 2023 decision by market regulator FINMA to wipe out Credit Suisse's Additional Tier 1 (AT1) bonds during the state-engineered takeover by its old rival UBS triggered an investor backlash and legal challenges.
UBS's shares fell after news of the Federal Administrative Court's decision broke, slipping over 3.5% in afternoon trade.
In a partial decision, the court said the 2023 AT1 bond write-off lacked a legal basis.
"It considered that the bondholders' property rights were seriously interfered with, which would have required a clear and formal legal basis. But no such basis existed," the court said.
The decision can be appealed at the country's top court.
The Swiss finance ministry and FINMA both said they would analyse the court's decision. UBS declined to comment.
"The decision is not completely unexpected, and I expect it to be appealed," said Hans Gersbach, a banking and economics professor at ETH University in Zurich.
The 2023 write-off stunned markets by prioritising shareholder compensation over bondholder claims, upending the normal capital structure hierarchy.
When Credit Suisse was taken over, shareholders received UBS stock valued at around $3.25 billion. AT1 holders were left with nothing, prompting lawsuits in Switzerland, the US, and investor-state arbitration under bilateral treaties.
Around 3,000 complainants lodged appeals with the court over FINMA's decree in about 360 cases, the court said. In essence, complainants requested that the decree be revoked, and that the write-off be reversed, it added.
The court made a partial decision in one appeal case and revoked FINMA's decree. It has not yet decided on the reversal request. The other cases are now suspended until a decision regarding the revocation of the decree has become final.
Law firm Quinn Emanuel, which represents many of the complainants, welcomed the court's decision.
"The Quinn Emanuel team is carefully reviewing the ruling to fully assess its implications," said Thomas Werlen, Quinn Emanuel's Managing Partner for Switzerland.
Investors are unlikely to recover the full 16.5 billion francs, analysts have previously said, as the bonds had lost considerable value by the time of Credit Suisse's rescue.
AT1 bonds, introduced after the 2008 financial crisis, are hybrid debt instruments issued by banks to bolster their capital buffers and absorb losses in times of stress.
The bonds, which are designed to help banks avoid taxpayer funded bailouts, typically offer higher yields than senior bank debt.
While terms for AT1 bonds allow for write-downs under certain conditions, investors argued that FINMA's action violated expectations and contractual norms.
