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US bondholders plan to sue Switzerland for $17 billion Credit Suisse's loss

As part of the bank's shotgun marriage with UBS, the Swiss government decided to write down $17 billion in Credit Suisse bonds. Distressed debt investors and corporate litigators in the US are planning to challenge this decision.

When Switzerland's government invoked an emergency decree to write down the bonds to zero while also arranging for UBS to distribute $3.25 billion to shareholders, it infuriated bond investors.

Designed to absorb losses when institutions face difficulties, AT1s are a type of debt that are typically seen as ranking above equity on the balance sheet.

David Tepper, the billionaire founder of Appaloosa Management, said, "If this is left to stand, how can you trust any debt security issued in Switzerland, or for that matter wider Europe, if governments can just change laws after the fact. Contracts are made to be honoured."

Tepper, who is renowned for gaining billions of dollars on a 2009 wager that US banks would not be nationalized during the previous financial crisis, is one of the most successful investors in distressed financial institutions. As the bank plunged into disarray, Appaloosa had purchased a variety of senior and junior debt issued by Credit Suisse.

Switzerland was "looking more like a banana republic," according to Mark Dowding, chief investment officer at RBC BlueBay, which held Credit Suisse AT1 notes. His Financial Capital Bond fund has experienced a loss of 12.2% this month.

In advance of the legal battle, some funds have started purchasing exposure to the debt. One of the institutions supporting claims trading is Goldman Sachs, which has provided prices at single-digit cents on the dollar.

Among the law firms defending bondholders are Quinn Emanuel Urquhart & Sullivan and Pallas Partners; Quinn hosted a call on Wednesday with more than 750 attendees.

Richard East, a lawyer at Quinn, told the Financial Times that the deal was "a resolution dressed up as a merger" and cited remarks made by the Bank of England and the European Central Bank that disavowed the Swiss strategy.

"You know something has gone wrong when other regulators come and politely point out that in a resolution [they] would have respected ordinary priorities," he continued.

According to the firm's attorneys, Quinn is considering filing lawsuits in other countries. The Finma regulator's actions could be contested on the grounds that they constitute an arbitrary use of discretion or a breach of investors' property rights.

The company is also looking into the possibility that Credit Suisse may be held accountable for misselling due to claims made to investors, particularly in a presentation to investors in March.

On Wednesday in the afternoon, Pallas Partners also conducted a call with prospective clients. There is "a very good argument that misrepresentations and misstatements have been made about the financial safety of Credit Suisse as recently as 14 March," according to Natasha Harrison, the firm's founding partner.

This week, after Credit Suisse's largest investor said he would not provide additional capital and rich clients withdrew SFr35 billion in deposits, the price of its AT1 bonds began to fall.

Global distressed funds spotted a chance and invested in some of the riskiest debt, betting that the government would prevent the collapse of its second-largest institution and instead negotiate a merger with UBS, a competitor.

Although the AT1 bonds issued by Credit Suisse included a clause warning that Swiss authorities "may not be required to follow any order of priority," a number of investors and analysts have contended that the clause's requirements were not followed.

The prospectus defines a "viability event" as when "customary measures" to increase the bank's capital adequacy are "inadequate or unfeasible" or the institution receives "an irrevocable commitment of extraordinary support from the public sector" to maintain its capital level. Typically, AT1s can only be triggered in these situations.

This Monday, the Swiss government said that a change in the law had provided them a "clearer legal basis" for cancelling the bonds.

Pimco, Invesco, BlueBay and Legg Mason are among the longer-term holders of Credit Suisse’s AT1 bonds.

According to a person familiar with the situation, Minnesota-based Värde Partners, a well-known alternative credit investor, had a tiny investment in AT1 bonds going into the fateful weekend.

A wider sell-off in AT1 debt has had a significant negative impact on funds managed by Algebris Investments, Lazard, and GAM, among other fund managers.

An iBoxx index of this type of debt shows that AT1s dropped as much as 19.5% in the month up through the end of Monday, but they have subsequently gained some ground.

On Monday, the Lazard Capital Fi fund, which invests in AT1s like Credit Suisse, lost 9%, bringing its monthly losses to 17.3%.



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