Regulators come under fire over Credit Suisse rescue deal
Supervisors under fire over Credit Suisse rescue agreement
The Bank of England stepped in yesterday to allay fears in bond markets after a furious argument erupted over UBS’s emergency takeover of Credit Suisse.
Holders of £14bn of convertible bonds were wiped out in the £2.6bn deal, meaning they were worse off than shareholders.
That led to the threat of legal action amid warnings that the move could make it more difficult for other lenders to raise new funds in the debt markets.
Collateral damage: The structure of the Credit Suisse takeover meant AT1 bonds in the collapsed Swiss lender worth £14bn would be reduced to zero
The Bank of England joined European regulators in assuring investors that they would take a different stance, helping to calm a bank bond sell-off after the deal was announced.
The row is about investors holding so-called AT1 bonds in the collapsed Swiss lender.
These are a type of debt investments created in the aftermath of the financial crisis that, if a lender gets into trouble, can be converted into equity.
Bondholders are normally expected to be above shareholders in dividing up the meager remains of a failed bank.
But the structure of the Credit Suisse takeover announced on Sunday evening meant that AT1 bonds worth £14bn would be reduced to zero.
Shareholders will receive £2.6bn under a deal that values their holdings about 60 per cent lower than Credit Suisse’s closing price on Friday. But they still avoid being wiped out altogether.
The bank’s AT1 bonds contained a clause that allowed Swiss authorities to write them off if the bank became unviable, regardless of what happened to equities – a clause analysts say is not typically found in European bonds.
Michael Schulman, chief investment officer at Running Point Capital Advisors, said: “It’s going to make AT1 bonds more expensive for all the other banks going forward because now everyone is going to see this added risk.”
Patrick Kauffmann, a fixed income portfolio manager at Aquila Asset Management, told the Financial Times that the move was “insane,” adding: “In my eyes, this is against the law.”
Law firm Quinn Emanuel said it had assembled a team of lawyers from Switzerland, the US and the UK who were in talks with investors representing a “significant percentage” of AT1 bonds.
UBS said the decision to write off the bonds was made by Swiss regulator Finma, so as not to create new liability for the bank.
The response from the Bank of England, along with the European Central Bank and other EU bodies, exposed cracks in what was otherwise a global consensus among regulators on the Swiss emergency deal.
The bank said: “The UK bank resolution framework has a clear legal sequence in which shareholders and creditors would bear losses in a resolution or insolvency scenario.”
EU regulators said they would continue to impose losses on shareholders rather than bondholders.