Credit Suisse bondholders sue Switzerland in the U.S. over $17 billion writedown of AT1 debt

A group of Credit Suisse bondholders filed a lawsuit against the Swiss government, seeking full compensation over the contentious decision to write down the failed bank’s Additional Tier 1 (AT1) debt.

As part of Credit Suisse’s emergency sale to UBS last year, which was orchestrated by the Swiss government, Swiss regulator Finma wiped out roughly $17 billion of the bank’s AT1s, writing them down to to zero.

The bank’s common shareholders received payouts when the sale was completed.

The move angered bondholders and was seen to have upended the usual European hierarchy of restitution in the event of a bank failure under the post-financial crisis Basel III framework, which typically places AT1 bondholders above stock investors.

Law firm Quinn Emanuel Urquhart & Sullivan, which represents the plaintiffs, said Thursday that it had filed a lawsuit in the U.S. District Court for the Southern District of New York. It described Switzerland’s decision to write down the plaintiffs’ AT1 value to zero as “an unlawful encroachment on the property rights of the AT1 Bondholders.”

A spokesperson for the Swiss Finance Ministry declined to comment.

Finma previously defended its decision to instruct Credit Suisse to write down its AT1 bonds in March last year as a “viability event.”

“Through its actions, Switzerland needlessly wiped out $17 billion in AT1 instruments, unjustly violating the property rights of the holders of those instruments,” Dennis Hranitzky, partner and head of Quinn Emanuel’s Sovereign Litigation practice, said in a statement.

The face value of the AT1 bonds held by the plaintiffs in the suit was over $82 million, Reuters reported, citing the filing.

AT1s are bank bonds that are considered a relatively risky form of junior debt. They date back to the aftermath of the 2008 global financial crisis, when regulators tried to shift risk away from taxpayers and increase the capital held by financial institutions to protect them against future crises.

One of the key attributes of AT1 bonds is that they are designed to absorb losses. This happens automatically when the capital ratio falls below the previously agreed threshold, and AT1s are converted into equity.

— CNBC’s Sophie Kiderlin contributed to this report.