Anger is growing at the terms of the rescue of Credit Suisse with other regulators criticising the US$17bn wipeout of AT1 bondholders in favour of shareholders.
Switzerland’s national bank announced last night that UBS would merge with beleaguered Credit Suisse in a deal that will see equity owners receive US$3.2bn, but holders of the AT1 or Coco Bonds lose all their money.
Europe’s central bank, the ECB, ticked off its Swiss counterpart for its actions accusing it of "breaking the norms" for a bank rescue by putting shareholders above bondholders.
In a joint statement, the ECB, the Single Resolution Board and the European Banking Authority said in these situations, “Common equity instruments, [ie shares] are the first ones to absorb losses, and only after their full use would AT1s be required to be written down.”
“This approach has been consistently applied in past cases and will continue to guide the actions of the SRB and ECB banking supervision in crisis interventions.”
The Bank of England too criticised the actions of the Swiss, saying shareholders should be on the hook before AT1 holders, an approach it had adopted in its rescue of Silicon Valley Bank.
"Holders of such instruments [shares] should expect to be exposed to losses in resolution or insolvency in the order of their positions in this hierarchy," the BoE said in a statement.
One Credit Suisse AT1 holder went further, claiming the action was illegal.
Patrik Kauffman, a fund manager at Aquila Asset Management who specialises in AT1s, told the Financial Times it was “insane” that under the terms of UBS’s takeover of Credit Suisse, AT1 bondholders were set to receive nothing while shareholders would walk away with SFr3bn (US$3.2bn).
“We’ve never seen this before. I don’t think this would be allowed to happen again.”
AT1 bonds were introduced in Europe after the global financial crisis to serve as shock absorbers when banks start to fail.
They are designed to impose permanent losses on bondholders or be converted into equity if a bank’s capital ratios fall below a predetermined level, effectively propping up its balance sheet and allowing it to stay in business.
The ATI market size is estimated to be around US$275bn in Europe.
Holders of AT1 bonds were already mobilising on Monday evening to take legal action against the Swiss National Bank.
Global litigation firm Quinn Emanuel Urquhart & Sullivan said it had put together a multi-jurisdictional team of lawyers from Switzerland, the US and the UK with discussions already underway with holders of a “significant percentage” of Credit Suisse’s AT1 capital instruments.
A call for bondholders is likely to be convened to take place on Wednesday, 22 March.
Other experts warned that the AT1 losses by Credit Suisse holders could herald the end of the market for the foreseeable market.