By now we have all read the news of the collapse of Credit Suisse and its takeover by UBS. This was after an agreement was reached with the Swiss authorities to avoid a declaration of bankruptcy.
Less talked about in the Spanish media is the fact that the agreement also includes the use of $17.3 billion of AT1 notes (also known as contingent convertible notes or ‘CoCos’) to absorb losses.
Bondholders will therefore see their value reduced to zero and their chances of recovering their investment with the money from the UBS purchase (more than €3 billion) or the Swiss government’s guarantee for any losses (more than €9 billion), while shareholders will be the big beneficiaries of this decision.
In the US, a class action lawsuit has already been filed in the courts of New Jersey (https://lnkd.in/d2kiR5Af) and Goldman Sachs has already informed its clients that it is ready to start negotiating claims on Credit Suisse bonds, satisfying investors who want to buy the potential claims against Credit Suisse in the expectation of obtaining damages through litigation.
The decision by the Swiss Financial Market Supervisory Authority (FINMA), UBS and Credit Suisse goes against the order of priority that shareholders should absorb losses first, as the shares are common equity instruments. Only then could Tier 1 shares be repaid.
Almost immediately, the ECB, the SRB and the European Banking Authority (EBA) issued a statement making clear that they disagreed with the Swiss decision and that Europe would not change the order of priority in the resolution framework of any financial institution.
It is clearly the intention of the European authorities to prevent investors in CoCo bonds of various financial institutions from fearing for their investment risk.