Credit Suisse AT1 Holders Wiped Out in UBS Deal Are Angry as Backstop Ends

Credit Suisse additional tier 1 bondholders are furious after UBS Group AG said it won’t need state support for its rescue deal, arguing that their wiped out notes should have been spared.

(Bloomberg) — Credit Suisse additional tier 1 bondholders are furious after UBS Group AG said it won’t need state support for its rescue deal, arguing that their wiped out notes should have been spared.

They say that if the government’s backstop was unnecessary, then so too was the historic writedown of about $17 billion of Credit Suisse’s AT1 notes, according to several investors who asked not to be identified because some of them are involved in ongoing litigation against Swiss authorities.

UBS said Friday it had terminated a 9 billion franc ($10.3 billion) agreement with the Swiss government to cover losses it could incur from the takeover of Credit Suisse — support that helped to facilitate the deal in March. The move will fan the flames of what promises to be a long and acrimonious battle in Switzerland’s courts, where Swiss authorities face claims representing more than 1,000 individual bondholders.

The investors say the Swiss banking watchdog’s decision to wipe out the AT1 bonds was unfair, especially because equity holders retained some value.

“I’m sure it will add fuel to the argument that there was no need for the writedown given this was a liquidity event and not an asset loss or capital depletion event,” said Simon Adamson, head of global financials research at CreditSights Inc. Still, he doesn’t think the writedown of AT1s was specifically linked to the loss protection agreement or to losses on Credit Suisse’s non-core assets.

And other analysts said the Swiss government could claim that the wipeout was effective, helping to absorb losses and stabilize the merged bank. AT1 bonds were designed to provide a capital buffer when banks are in trouble.

One could argue that “it is partly because of the AT1 wipeout that they are now able to rid themselves from the rest of the government aid measures,” said Suvi Platerink Kosonen, banking credit analyst at ING.

The few brokers making a market on the AT1 claims are still offering to buy them for pennies, one of the investors said, suggesting that the chances of a successful claim by holders remains low. 

A spokesperson for Swiss banking regulator Finma said the removal of the backstop was a further step toward normalization following the extraordinary events of March but declined to comment specifically on the impact on AT1 claims. The federal government doesn’t comment on ongoing court proceedings and related risks and speculation, according to a spokesperson. UBS declined to comment.


“I can see why claimants were incensed by this, looking from the outside,” said Filippo Maria Alloatti, head of financials at Federated Hermes. “Potentially, you could argue that it was not necessary in the first place,” he said, while adding that the opposite argument could also be made.

AT1 bonds, also known as contingent convertibles, are the riskiest type of bank debt. Designed to take losses or convert to equity once a bank’s capital falls below a predetermined level, they were introduced after the 2008 financial crisis when regulators saw previous forms of capital as inadequate.

Read more: Call Them AT1s or CoCos, Here’s Why They Can Blow Up

The Credit Suisse wipeout initially sparked a rout for the asset class amid concerns about the pecking order of claims when a lender is in trouble. Investors were also worried that soaring refinancing costs would prompt banks to leave their AT1 bonds outstanding beyond the first call date. But lenders such as HSBC Holdings Plc and Barclays Plc have continued to repurchase their AT1s this year, helping the market recover.

Despite the uproar among Credit Suisse’s AT1 bondholders, UBS shares got a boost, with analysts saying that the end of the loss protection agreement increases confidence about the integration of Credit Suisse and the health of its non-core portfolio.

Credit Suisse is “the bank that keeps on making headlines even after it’s dead,” Alloatti said.

–With assistance from Myriam Balezou.

(Adds details on AT1 claims, comment from Finma.)

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