Swiss government bond wipeout

March 21, 2023 - Holders of $17.3 billion of Credit Suisse’s Additional Tier 1 debt will have their bonds wiped out as part of the state-backed takeover by UBS, triggering uproar across European debt markets.

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On Sunday, the Swiss National Bank (SNB) announced that UBS would buy Credit Suisse for SFr3 billion Swiss francs ($3.25bnn).

Credit Suisse shareholders will receive the equivalent of just SFr0.7 in UBS shares for stock worth SFr1.86 on Friday.

Additional Tier 1 (AT1) bonds, also known as “contingent convertibles” or “CoCos,” were created in the wake of the 2008 financial crisis as a way for failing banks to absorb losses, making a taxpayer-funded bailout less likely.

Lawyers from Switzerland, the United States and the UK are talking to several Credit Suisse AT1 bondholders about possible legal action.

In Switzerland, the bonds’ terms state that if a bank runs into trouble, the financial regulator is under no obligation to adhere to the traditional creditor hierarchy -- Core Equity Tier 1 (CET1) shareholders usually rank below AT1 bondholders in terms of who gets paid -- which is how Credit Suisse AT1 bondholders lost out.

In EU member states applying the bloc’s bank resolution tools must ensure that the shareholders of the affected bank bear first losses.

Banking rules in the UK include a statutory order whereby CET1 holders must first be exposed to losses, followed by owners of AT1 instruments and then holders of Tier-2 debt.

The SNB’s decision to ignore market convention has rattled Europe’s $250bn AT1 bond market.