6/3/23, 8:30 PM
Bondholders prepare treaty claim over Credit Suisse - Global Arbitration Review
Bondholders prepare treaty claim over Credit Suisse
Tom Jones
19 April 2023
UPDATED. Credit Suisse bondholders based in Singapore are reportedly preparing an investment treaty claim against
Switzerland after their bonds became worthless following the bank’s recent takeover by UBS.
Singapore’s Straits Times reported on 17 April that several investors have contacted lawyers over a potential claim under the
free trade agreement between Singapore and the European Free Trade Association (EFTA), which includes Switzerland.
GAR understands that the number of potential claimants has grown to more than 80. The investors are speaking with
WilmerHale partner Jonathan Lim in London and Singaporean firm Engelin Teh Practice about the potential claim.
If filed, it would be the first known investment arbitration filed under the Singapore-EFTA agreement. The treaty provides for
ICSID or UNCITRAL arbitration.
Swiss authorities approved the takeover of Credit Suisse by UBS in March to resolve a liquidity crisis at the bank and avoid a
national financial crisis.
As part of the deal, the Swiss Financial Market Supervisory Authority (FINMA) ordered the “complete write-down” of 16 billion
Swiss francs (US$17.8 billion) worth of Credit Suisse’s additional tier (AT1) bonds, leaving them valueless. AT1 bonds are a
category of bond created after the 2008 financial crash and are designed to convert into equity if the bank’s capital falls below
requirements.
FINMA’s decision to write down the bonds was authorised by emergency legislation passed by the Swiss parliament days
earlier.
Now, more than 80 Singapore-based investors who collectively held bonds formerly worth tens of millions of dollars allege the
terms of the takeover violated the treaty’s investment protection provisions.
While FINMA says the bonds are mainly held by institutional investors, given their risk profile and large denominations, the
Singaporean bondholders contemplating the claim are reportedly comprised of individual investors and family offices.
Lim told Straits Times that FINMA’s actions forced bondholders to absorb losses ahead of the bank’s shareholders, potentially
amounting to a failure to provide fair and equitable treatment to foreign investors.
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Bondholders prepare treaty claim over Credit Suisse - Global Arbitration Review
He also said there are arguments that FINMA’s order violated the bondholders’ legitimate expectations, as typically the
bondholders would be ranked ahead of shareholders in creditor claims following a bank collapse, and that the complete writedown of the bonds could constitute indirect expropriation.
Lim says WilmerHale is speaking with litigation funders who are open to funding the investment treaty claim. He also said that
an investment treaty claim was potentially open to AT1 bondholders from China, India, Japan and South Korea, as these
countries also have treaties with Switzerland.
Shaun Lew, an associate director at Engelin Teh Practice, says his firm is in contact with Quinn Emanuel Urquhart & Sullivan,
which has already been instructed by one group of AT1 bondholders to represent them in discussions with Swiss authorities
and potential litigation over the takeover. The group is made up mainly by funds and some asset managers.
London disputes boutique Pallas Partners is also building a group of bondholders to pursue potential claims. It is understood
the firm doesn’t currently intend to pursue the investment treaty arbitration option, regarding the process as too slow.
GAR understands that several other Asia-based bondholders are also taking legal advice over potential remedies against the
Swiss government. More than 100 bondholders are currently speaking with Drew & Napier directors Mahesh Rai and Benedict
Teo about a potential regulatory challenge to FINMA's actions, while potential investment treaty claims under the SingaporeEFTA agreement and other BITs Switzerland has signed with Asian states are also being explored.
FINMA’s decision to order the write-down of the A1 bonds was queried by the European Central Bank, which pointed out that
the European Union’s resolution framework provides that shareholders and creditors should bear losses before bondholders.
The regulator defended the write-down of the AT1 bonds’ values in a statement on 23 March, saying it took the measure as the
AT1 bonds contractually provide that they should be written down in a “viability event”, which includes where extraordinary
government support is granted.
Swiss prosecutors announced earlier this month that they were looking into the circumstances of UBS’ takeover of Credit
Suisse. In an emailed statement on 3 April, Switzerland’s Office of the Attorney General (OAG) said it has requested
“clarification” from various sources to help them understand whether any crimes were committed.
Tom Jones
Author
tom.jones@lbresearch.com
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