Last week the Swiss regulator put numbers on the write-downs of Additional Tier 1 bonds that Credit Suisse had issued. These bonds were designed to provide banks with a form of capital buffer.

Switzerland’s main financial regulator has spelled out the basis for writing down the nominal value of high-risk bonds, Additional Tier 1 instruments, issued by Credit Suisse. Holders of AT1s have seen these assets wiped out, prompting potential litigation. The matter is controversial because debt-holders have been subordinated to equity owners of the stricken Swiss bank – a reversal of capital structure seniority.

“FINMA has instructed Credit Suisse to completely write down its AT1 instruments and to inform the bondholders concerned without delay. Tier 2 bonds are not written down. Questions regarding individual bonds should be addressed to the issuers of the capital instruments,” the regulator said in a statement last Thursday. 

“The AT1 instruments issued by Credit Suisse contractually provide that they will be completely written down in a `Viability Event’, in particular if extraordinary government support is granted. As Credit Suisse was granted extraordinary liquidity assistance loans secured by a federal default guarantee on 19 March 2023, these contractual conditions were met for the AT1 instruments issued by the bank,” FINMA, aka the Swiss Financial Market Supervisory Authority, said. 

On 19 March, the Swiss federal government authorised the regulator to write down the capital as part of the arrangements for UBS’s takeover of Credit Suisse for $3.23 billion. 

PIMCO, the US fixed income asset manager, BlackRock and Invesco are among the most prominent losers from the write-down of AT1s. A report by Bloomberg last week said that traders at Goldman Sachs are preparing to take bids on claims against Credit Suisse that could see investors recover some value, potentially through litigation.

AT1 instruments in Switzerland are designed in such a way that they are written down or converted into Common Equity Tier 1 capital before the equity capital of the bank concerned is completely used up or written down. The instruments publicly issued by large banks are mainly held by institutional investors due to their risk profile and large denominations, FINMA said.