Swiss regulator defends its decision to write off AT1 bonds

Switzerland’s financial market regulator FINMA defended its decision to impose steep losses on some of Credit Suisse’s bondholders on Thursday, saying the decision was legally watertight.

On Sunday, Switzerland announced a multi-billion franc rescue of Credit Suisse, which will see it taken over by UBS.

As part of that deal, the Swiss regulator said 16 billion Swiss francs ($17.49 billion) of the lender’s Additional Tier 1 debt to be written down to zero, while shareholders received some compensation.

The decision that prioritised shareholders over AT1 bondholders rattled the $275 billion AT1 bond market, prompting a sharp fall in prices on Monday. Some Credit Suisse AT1 bondholders are seeking legal advice.

“The AT1 instruments issued by Credit Suisse contractually provide that they will be completely written down in a ‘viability event’, in particular, if extraordinary government support is granted,” FINMA said.

“As Credit Suisse received extraordinary liquidity assistance loans secured by a federal default guarantee on 19 March 2023, these contractual conditions were met for the AT1 instruments issued by the bank,” it added.

Tier 2 bonds will not be written down, FINMA said.

FINMA Director Urban Angehrn said that “a solution was found on Sunday to protect clients, the financial centre and the markets”.

European regulators on Monday stepped in to say they would continue to impose losses on shareholders before bondholders – unlike the treatment of bondholders at Credit Suisse.

In a bid to boost confidence among bondholders, UBS (UBSG.S) said on Wednesday it would buy back 2.75 billion euros worth of debt it sold just days ago.

($1 = 0.9148 Swiss francs)