Credit Suisse AT1 write-down aftermath

As we approach the second anniversary of the March 2023 collapse of Credit Suisse, the story is hardly fading gracefully into oblivion. Quite the contrary in fact.

The last trading day of CS shares on SIX Swiss Exchange was June 12 2023, before UBS closed its Swiss government-marshalled takeover. But the decision to offer CS shareholders residual value in the form of one UBS share for every 22.48 CS shares while AT1 holders were wiped out continues to be the source of bitter recriminations that are showing no signs of easing.

The barrage of class-action lawsuits and arbitration claims around the world has been prompted by various factors but perhaps the two principal drivers are claims that the decision breached investors’ property rights and upended the creditor hierarchy that market participants and plaintiffs had widely assumed.

As well as AT1 holders, a lot of Credit Suisse shareholders have also launched class-action suits seeking compensation because they deem the share exchange ratio to have been wholly inappropriate, on the basis that CS’s market capitalisation at the close of trading on the stock’s last trading day was CHF 7.3 billion while the takeover price announced on 19 March 2023 was CHF 3 billion.

Legal due process always takes time, but a number of court deadlines hit in 2025 so the fireworks could be about to begin.

Key questions remain

A lot of water has flowed under the bridge around the decision to write down to zero USD 17.3 billion equivalent of AT1s. But key questions still remain, which will doubtless be expounded on at great length in the courts and in arbitration hearings, including:

• Was the decision by the Swiss authorities to force a write-down of the hybrid securities justified and legal?
• Were Write-down Events triggered in line with the contractual language in each of the AT1 prospectuses?
• Were the terms of Contingency Events Notices or Viability Events met?
• Or is all of that irrelevant, on the basis that the emergency ordinances the Swiss authorities enacted and which empowered them to issue the Write-Down Direction, overruled pre-existing legal terms?
• What do Swiss inter-agency communications tell us about what officials really thought about the events surrounding Credit Suisse in the run-up to Wednesday March 15th 2023 (when FINMA confirmed that Credit Suisse was compliant with minimum regulatory capital requirements) and the decision they reached that unless a merger with UBS was agreed by Sunday March 19th, CS would be placed into resolution or bankruptcy? The Federal Council’s amended ordinance of March 19th allowed the extraordinary measures to be initiated that facilitated the merger with UBS, which authorities had already deemed to be the only orderly outcome.

Prasad Gollakota, xUnlocked’s Chief Content Officer, wrote a very insightful and detailed comment on the terms of the relevant AT1 securities, including a recap on AT1s, the loss-absorption features in Credit Suisse’s AT1, including the terms of Viability Events and other risk factors. You can read it here.

Credit Suisse AT1s written down

Parliamentary investigation committee report - key findings

Criticism and areas for improvement

There has already been a tidal wave of comment, opinion and several official reports into the CS debacle. And they continue to be published. Lawyers acting for plaintiffs and defendants alike in the class actions pored over the Swiss Parliamentary Investigation Committee‘s (PUK, according to its German acronym) 569-page report, dated December 17 2024, into the conduct of the Swiss authorities in the CS situation.

The report – The management of federal authorities in the context of the CS crisis (in German only) – attributed the crisis to years of mismanagement at the bank, including inadequate risk management and strategic errors that weakened the bank’s stability. However, the report found no misconduct by authorities that led to or caused the crisis. “Responsibility for the loss of confidence in Credit Suisse and the difficulties that jeopardised its existence in March 2023 lies with its Board of Directors and Executive Board, who had defied numerous interventions by FINMA in the preceding years,” the English press release issued alongside the report noted.

The report concluded that the Swiss authorities prevented a global financial crisis when CS went down in March 2023. That claim arguably reaches the outer edges of presumption, but in the light of the parallel US regional bank crisis that was unfolding at the same time, markets were certainly volatile and uncertainty abounded.

Lawyers will be reading carefully between the lines of the several areas of criticism and areas the report also highlighted for improvement in enforcement and legislation, related to:

• The lack of effectiveness of FINMA’s banking supervision, specifically that its supervisory activities were insufficiently rigorous to identify and address the accumulating risks at CS;
• FINMA’s relaxation of capital requirements;
• The slow development of Too Big To Fail (TBTF) legislation in Switzerland;
• Delayed crisis response: Federal authorities (including the Federal Department of Finance and the Swiss National Bank) were found to have reacted late to the emerging crisis. Their delayed response limited the options available to manage the situation effectively;
• Shortcomings in the flow of information between the Federal Department of Finance, FINMA, SNB), which may have hindered decisive action being taken at an earlier stage.

The report made 20 recommendations to the Swiss Federal Council, plus six postulates, four motions and one parliamentary initiative. It called for specific improvements, including a more international approach to TBTF regulation, more effective rules for systemically important banks, and clearer directives on co-ordination with the agencies responsible for financial stability in Switzerland, ensuring more proactive and preventive supervisory measures to avert similar crises in the future.

The recommendations were rather administrative in nature and guided the authorities to address some of the shortcomings the report found. The motions called for an amendment to Swiss TBTF legislation based on the findings of the CS crisis; a restriction in any easing of SIB capital and liquidity requirements; a strengthening of FINMA's assertiveness vis-a-vis SIBs; and for an extension of the Swiss National Bank’s powers regarding any Emergency Liquidity Assistance provided to SIBs.

The postulates called for any conflicts of interest in the auditing of banks to be eliminated; for a review of early crisis detection; to stamp out perverse incentives in bonus structures for SIB staff; for a strengthening of the shareholder base of systemically important companies; and for the governing bodies of SIBs to bear more responsibility towards the Swiss economy and taxpayers.

The report found that before the CS crisis, the Federal Council and Swiss Parliament delayed the adoption of international standards (Basel 3, BCBS, FSB principles) on TBTF legislation and gave too much consideration to the concerns of systemically important banks. The report was critical of the Federal Council’s repeated granting of extended transitional periods to SIBs to comply with legal developments; and its hesitancy regarding the introduction of a public liquidity backstop for SIBs.

FINMA's supervisory activities were intensive, the report found, but they lacked impact, since CS “continued to be plagued by a series of scandals”. The report found it “regrettable” that FINMA did not withdraw the recognition for guarantees of proper business conduct during this period.

The PUK also failed to understand why FINMA granted CS extensive easing of its capital requirements in 2017 in the form of a regulatory filter, which it said allowed the bank to switch from a portfolio valuation to individual valuation method without a requirement to substantially build up capital immediately. Without the filter, CS would reportedly have marginally failed to meet capital adequacy requirements in 2021 but significantly so in 2022.

The report says the emergency legislation that was enacted was done so in accordance with the law, because at the point it was applied and because of the acute situation at CS, an alternative to a forced merger with UBS with a foreign bank was no longer feasible “even if that might have been more advantageous for Switzerland's competitive position in the longer term”.

New evidence – SASV

The Swiss Investor Protection Association (Schweizerischer Anlegerschutzverein, SASV) considers the report to be new evidence in its proceedings against UBS, as do other plaintiffs. The SASV is co-ordinating a lawsuit according to Art. 105 of the Swiss Merger Act with the support of Zurich law firm Niedermann Rechtsanwälte.

On January 10th 2025, the SASV submitted an amendment to the Zurich Commercial Court saying the PUK report’s findings confirm the arguments put forward in its original complaint, which claimed the CHF 3 billion takeover price paid by UBS for CS was, firstly, set arbitrarily and secondly was significantly too low. And thirdly, the Federal Council deliberately did not exclude the possibility of a judicial review of the exchange ratio.

“The PUK report clearly shows that UBS exerted massive pressure on the Board of Directors of Credit Suisse, both directly and indirectly via the federal authorities, to accept a low purchase price that was determined without any objective basis for valuation,” according to a SASB communication. “As the PUK report shows, UBS was already expecting significant profits as a result of the merger but was not prepared to share these with shareholders of Credit Suisse on an objective basis ...

“The PUK report confirms that UBS itself also always assumed going-concern values. According to the report, UBS also demanded the cancellation of the distribution restrictions at Credit Suisse, which indicates that UBS considered Credit Suisse's ability to pay dividends after the merger to be intact [...] According to the PUK report, representatives of the Confederation must have been aware that the rights of CS shareholders were being massively curtailed …”

The SASV is seeking compensation for CS shareholders corresponding to the value between the share price set by the merger agreement and one determined by the court.

On January 24th 2025, the SASV reported that the Zurich Commercial Court had informed its legal representatives that UBS had been granted an extension and now has until March 24th 2025 to respond to the last written submission and the recently submitted new submissions on the PUK report.

LegalPass

Lausanne-based legal support firm LegalPass has also taken action against the share exchange ratio with the support of Zurich law firm Baumgartner Mächler and the backing of The Ethos Foundation, seeking compensation along the same lines.

More than 3,000 shareholders are covered in LegalPass’s Credit US class action, which was submitted to the Zurich Commercial Court in August 2023. UBS’s statement of defence, submitted in February 2024, asked the court to dismiss the claim in its entirety. According to LegalPass, the most surprising element was UBS's assertion that Credit Suisse Group AG has in fact been undercapitalised for a long time, which LegalClaim notes contradicts statements made by the authorities to-date.

Also according to LegalPass, the court decided to merge all exchange ratio control proceedings (Merger Act 105) opened against UBS into a single proceeding (representing 37 other plaintiffs).

Class actions and arbitration claims

AT1 class actions abound

Beyond the shareholder lawsuits, a barrage of class actions have been filed regarding the AT1 write-down. Outcomes here remain to be seen as no legal judgments have been handed down. The information below is drawn from public sources. It makes no claim to be exhaustive. But what a perusal of court documents shows is a mighty battle of legal ping pong is underway. While many of the points are clustered around different interpretations of factual elements, many others are point-of-law or jurisdictional issues. Whatever happens, this case in its broadest sense will make for a fascinating spectacle when the complaints come to court and arbitration hearings get underway.

Quinn Emanuel Urquhart & Sullivan

Quinn Emanuel (QE) is the principal law firm representing holders of CS AT1s among the many that have initiated proceedings. Swiss and international holders of CS AT1s instructed QE at the end of March 2023 to represent them in discussions with Swiss authorities and in litigation to recover their losses.

QE’s fundamental case is that the decision to wipe out the AT1 was “an unlawful encroachment on the property rights of the AT1 bondholders”. To provide a focal point for AT1 holders, QE set up a website – www.QuinnAT1bondholdergroup.com. The firm also convened a group of law firms from various jurisdictions representing investor sub-groups to QE’s main bondholder group, with smaller individual bond holdings:

• In the US: Wollmuth Maher & Deutsch LLP. WMD is also advising current and former employees who were granted contingent capital awards as part of their compensation, which were also cancelled (reportedly to the tune of USD 400 million);
• In the UK: Keidan Harrison LLP;
• In Singapore: Engelin Teh Practice LLC;
• In the GCC, Global Advocacy and Legal Counsel;
• In Switzerland: Geissbühler Weber & Partners.

QE lodged an appeal in the Swiss Federal Administrative Court (FAC) in St Gallen against FINMA’s decision to write down the AT1s in April 2023, the first in a series of steps it said at the time it would be taking. Additional plaintiffs were added to the complaint in May 2023, taking the number of bondholders QE is representing to over 1,000 holding around a third of the total notional value of CS AT1s written down.

Speaking to the point about investors with smaller AT1 holdings, QE noted (via a press release from its media advisors Greenbrook at the time of the May 2023 addition to the Swiss appeal) that bonds were sold to a large variety of investors, not just institutional investors but retail investors too, since the CHF instruments had denominations and minimum trading values of CHF 5,000.

The Swiss court is expected to break silence on this case imminently.

The Swiss court noted, incidentally, that within weeks of FINMA’s decision on CS AT1s, it had received roughly 230 appeals involving around 2,500 appellants.

US complaint

QE, alongside WMD, also filed a complaint in the District Court for the Southern District of New York on June 6th 2024. This was amended on January 8th 2025 to add 39 plaintiffs to the eight in the original complaint. The amended complaint made multiple references to the PUK report, claiming its findings support its case. The additions of plaintiffs in the amended complaint were predominantly funds of AllianceBernstein. The value of CS AT1 holdings represented went up from USD 82 million to over USD 372 million.

QE is seeking as relief a money judgment for the face value of the plaintiffs’ beneficially owned AT1 holdings plus costs and interest (accruing from March 19 2023 at 9% per annum until paid), and any additional relief as deemed appropriate.

The complaint was filed in New York because it asserts that the AT1s in question were registered with and cleared through the Depository Trust Company in New York so had a direct effect there. QE’s complaint also made the point that because challenges to Switzerland’s Takeover and Write-Down Direction had to be brought within 30 days, plaintiffs who missed that deadline no longer have recourse in the Swiss courts.

The point about direct effects was rejected by the Swiss government’s claim, submitted to the court on December 4th 2024 by Wachtell, Lipton, Rosen and Katz, to have the complaint dismissed on the basis of sovereign immunity.

Not a sovereign action

QE’s US complaint states: “Eschewing its regulatory role and instead assuming the role of an investment bank brokering the sale of a distressed bank, Switzerland cherry-picked the only remaining major Swiss bank, UBS Group AG, to buy Credit Suisse without considering any other potential buyers. Switzerland then wiped out the AT1s – unnecessarily and in plain violation of the investors’ rights – to facilitate the merger.

Rather than triggering its “state-of the-art” resolution procedures, the complaint says “Switzerland threw out the resolution playbook and employed what it described as a ‘commercial solution’ to Credit Suisse’s financial woes – stepping out of its regulatory shoes to broker, in its words, a ‘private-law merger’ of Credit Suisse by UBS.”

“Switzerland botched the job”, the complaint continues, “driven by pride and economic nationalism and at the behest of self-interested politicians”. Without any competitors to bid for CS, UBS was free to name its price and dictate the terms of its acquisition, the complaint states, resulting in the deal of the century for UBS, which acquired one of the world’s largest banks for a song.

The Swiss government’s sovereign immunity claim countered that it acted as a regulator of the marketplace, not a private player within it. Its actions “were thus quintessentially regulatory, not ‘commercial’.” The Swiss government’s submission is that the country’s immunity from suit provides a clear ground for dismissal.

The claim’s second ground for dismissal is around venue and jurisdiction (the so-called forum non conveniens doctrine). This holds that the US court lacks jurisdiction because Switzerland is immune from suit, and that Swiss courts are as “the most sensible, the most efficient, the most convenient forum for adjudication of this dispute – a dispute under Swiss law, against the Swiss government, for allegedly violating the terms of notes issued by a Swiss bank and subject to a Swiss forum-selection clause”.

The Swiss Confederation’s claim for dismissal noted that even if the US court determines that it has jurisdiction and that it should exercise that jurisdiction, the action should still be dismissed. “Assuming the truth of the factual allegations of the complaint, the complaint fails to state a claim upon which relief can be granted,” the Swiss claim states. An updated motion to dismiss is expected between now and the end of February.

Instrument terms

On the technicalities of the AT1 instruments themselves, QE’s complaint claims the Write-Down Direction was not authorised by the terms of the AT1s (something the Swiss Confederation’s claim for dismissal refutes).

QE’s complaint notes that when CS was informed of the authorities’ intention to order the write-down, it protested that the Write-Down Direction was prohibited under the AT1s’ contractual terms. “Undeterred, to paper over its illegal conduct, Switzerland enacted a bespoke emergency ordinance to empower itself to issue the Write-Down Direction,” the QE complaint continued.

Someone had to shoulder the costs from the takeover and subsidise UBS’s gains, the complaint says. “And that someone was AT1 bondholders like Plaintiffs.” Switzerland chose to issue the Write-Down Direction because it intended to make the predominantly foreign AT1 bondholders subsidise the gains of UBS. “The Write-Down Direction, in short, was Switzerland’s way of picking the takeover’s winners and losers”.

It called the Write-Down Direction “a singular event in financial history: a conversion of creditors’ property rights by Switzerland’s executive branch of government designed to facilitate a commercial takeover of a company that was not in bankruptcy”. The Write-Down Direction was also “impermissible under the AT1s’ governing terms”.

CS suffered a crisis of confidence and a liquidity problem “at most” in March 2023, outside the terms to issue a Write-Down Direction. “The bondholders agreed only to a write-down in response to capital adequacy problems, not liquidity issues. The Write-Down Direction was issued without any regard to a fair market valuation of Credit Suisse’s assets. As such, it was a fiction that lacked economic basis or substance.”

The Write-Down Direction was consumer-oriented because it targeted AT1s which were securities marketed to all members of the public. Switzerland’s actions were deceptive because they caused Credit Suisse to deceptively promise that it would pay the AT1s based on certain terms set in advance but fail to keep that promise.

Cascade of additional actions

As well as the QE-led lawsuits, a number of other law firms are representing holders of CS AT1s and seeking to have the decision to write them down overturned and for their clients to receive the value of their holdings.

Pallas Partners LLP

The UK law firm is co-ordinating proceedings against FINMA on behalf of two large groups of CS AT1 holders in Switzerland, as part of what it called a broader litigation strategy. The first group initially comprised over 90 global institutional investors and asset managers accounting for over USD 1.35 billion in nominal value of AT1s. The second group initially comprised 460 retail and family-office clients accounting for over USD 160 million.

Pallas is calling for the emergency ordinances issued by FINMA on 19 March to be considered invalid and for AT1s to be re-stated. The case hangs on whether the write-down constituted an arbitrary violation of the property rights of the AT1 holders, in breach of Swiss constitutional and other legal protections. Pallas and Swiss counsel set about building a multi-jurisdictional litigation strategy to seek to recover value for the AT1 holders, including public and private law claims in Switzerland.

Drew & Napier; Nater Dallafior

Law firms Drew & Napier (D&N) in Singapore and Nater Dallafior in Switzerland are assisting two groups, reported to be of around 400 bondholders in Asia Pacific, bring administrative-law challenges based on Swiss legal principles. The bondholders are seeking to set aside FINMA’s direction to Credit Suisse to write-down and cancel all AT1 bonds.

The challenge says FINMA’s exercise of its discretion to order CS to write down its AT1s was improper and/or invalid, on the grounds that, among other things, it violated the principle of proportionality and was issued in bad faith.

D&N is working with Omni Bridgeway, a third-party litigation funder, which is funding investor-state claims against the Swiss Confederation for compensation on behalf of CS AT1 holders. It says that in investor-state and treaty claims, bondholders have rights to claim compensation under international investment treaties, which are international agreements that offer private individuals and companies rights to seek compensation when a foreign government harms investments they made in that country.

Individuals or companies covered by Omni’s funding must be nationals or operate in mainland China, Hong Kong, Singapore, Japan, South Korea, Kuwait, Oman, Philippines, Qatar, Saudi Arabia or UAE. And they must have acquired CS AT1s prior to 19 March 2023 and still held them on that date.

As well as representing dozens of AT1 bondholders in an appeal against FINMA, Nater Dallafior is representing former and current Credit Suisse/UBS employees in an appeal against FINMA over the cancellation of Contingent Capital Awards and deferred variable compensation.

Withers Worldwide

Singapore law firm Withers Worldwide said it is “proactively co-ordinating funded investor-state arbitration claims” on behalf of CS AT1 holders in Asia and the Middle East against the Swiss Confederation to safeguard the rights of its clients to claim for losses. The firm is acting for over 100 Singapore-based bondholders with claims of close to SGD 200 million. It conducted a townhall for affected bondholders in Hong Kong in May 2024 and said clients approaching it constitute aggregate claims reaching USD 100 million.

The basis for the claim resides in Switzerland’s alleged breach of international obligations to protect foreign investments, including obligations to accord fair and equitable treatment to investments and returns of investors from relevant jurisdictions, and expropriating investments lawfully and on a non-discriminatory basis, for a public purpose and with proper and adequate compensation.

The claim also alleges that Switzerland perverted the well-established loss-absorption hierarchy when taking emergency actions over the weekend of 18-19 March 2023. In addition, the legal criteria for exercising any contractual powers to write down were not fulfilled at the material time. Bondholders would be entitled to fair compensation for the losses suffered by Switzerland’s breaches of its international obligations.

Mori Hamada & Matsumoto

The Japanese law firm is acting as lead arbitration counsel to a group of around 200 Japanese investors with a total face value of roughly USD 200 million in CS AT1s. On December 20th 2024, the firm sent a trigger letter to Switzerland under the Japan-Switzerland Economic Partnership Agreement, seeking damages through arbitration proceedings against Switzerland in the International Centre for Settlement of Investment Disputes.

Litigation Capital Management, a third-party litigation funder listed on London’s AIM, is bearing all the costs of pursuing proceedings (including attorneys' fees) on behalf of the Japanese investors. By forming a claimant group consisting solely of Japanese investors, the aim is to improve the recovery rate and achieve a swift resolution.

Clyde & Co

Clyde is also taking the arbitration route. In March 2024, the firm said it had prepared a legal opinion on the viability of investment treaty claims in international arbitration proceedings, supported by an expert financial report provided by Charles River Associates. Clyde said at the time it was planning to launch a series of investment arbitration claims that will apply international law and investor protection provisions to bring effective international remedy to investors.

The claims will be launched on behalf of Credit Suisse AT1 investors from a series of jurisdictions, including but not limited to China, Hong Kong, Japan, South Korea, Singapore and the UAE. Claims combine international arbitration and public international law with collective redress techniques.

Conclusion

Epilogue

So while legal battle around the Credit Suisse collapse has well and truly been enjoined, how have developments around the write-down of the AT1s affected the narrative about the future of the hybrid capital instrument? The short answer is: a lot – even though we are far from reaching any concrete outcomes given the complexities at play, and given that new developments continue to emerge. And outcomes will be required for all of the multiple layers of this saga: contractual, legal and political.

What the developments have made clear is that any notion of a bond transaction being governed strictly and exclusively by its formal contractual terms as laid out in its documentation has been superseded – in this case by other factors including the power and legality of governments to enforce outcomes through post hoc legislation.

As for the future of AT1 instruments, there had already been a lot of talk about whether they are fit for purpose prior to the collapse of Credit Suisse. In the wake of the Swiss decision to write down CS AT1s, the Bank of England and its EU counterparts (ECB Banking Supervision, Single Resolution Board, European Banking Authority) were quick to jump to the defence of a creditor hierarchy that puts common equity instruments first in line to absorb losses, followed by AT1 capital only after common equity had been fully use used up.

But a Dutch Ministry of Finance report in March 2024 (Policy directions for a resilient banking sector) certainly questioned the utility of the instrument, while one of the conclusions of a September 2023 Bank for International settlements report (Upside down: when AT1 instruments absorb losses before equity) was that authorities “may wish to consider whether there is merit in pursuing regulatory work aimed at increasing the transparency and disclosure of AT1 instruments' characteristics”, given the potential for market misperceptions regarding the functioning of AT1 bonds.

Australian regulators took the narrative to its ultimate conclusion: in December 2024, the Australian Prudential Regulation Authority confirmed that it will phase out the use of AT1 capital instruments by Australian banks in order to simplify and improve the effectiveness of bank capital in a crisis. While the Australian AT1 market has distinct characteristics compared to its international counterparts in that it has a large retail component, APRA’s move was widely seen as a reasonable outcome to the multiple uncertainties created by the Credit Suisse AT1 write-down.