7 ASIAN LEGAL BUSINESS – JUNE 2023 WWW.LEGALBUSINESSONLINE.COM BRI EFS Leong of Withers points out that bondholders’ expectations that their investment ranked above equity go beyond common-sense legal hierarchy. “Bondholders are not granted the powers and privileges that come with being a shareholder,” says Leong. Drew’s Teo concurs, drawing on an industry-wide rebuttal to the Swiss decision. “European regulators, including the Bank of England and the European Central Bank, as well as the Monetary Authority of Singapore, issued statements reassuring investors that AT1 bondholders rank above shareholders under the resolution frameworks in their jurisdiction. These moves underscore the long-established practice of giving bondholders priority over shareholders in debt recovery,” says Teo. CONTRACTUAL RIGHTS On May 18, a Swiss court handed the first legal victory to aggrieved bondholders by ordering Finma to release the fateful decree asking CS to wipe out their investments, giving claimants a boost of visibility into the core legal issue. Finma has insisted that the order was justified based on the AT1 prospectuses, which stipulated that writedowns could be triggered if a “Contingency Event” or a “Viability Event” occurs. It was undisputed that a “Contingency Event” – which required the common equity tier 1 capital ratio of CS to fall below seven percent – did not materialise. But debates have been raging over whether there arose a “Viability Event,” where in one scenario, Finma must determine that a write-down is essential to prevent CS from becoming insolvent or from ceasing to carry on its business while “customary measures” to improve the bank’s capital adequacy are at the time “inadequate” or “unfeasible.” Alternatively, there must be an “irrevocable commitment of extraordinary support from the Public Sector” that improves CS’ capital adequacy. Alluding to the second scenario, Finma stated in its decree - cited by the Financial Times - that it has satisfied the so-called “Viability Event” clause to give CS the power to write off the AT1 instruments by itself because governmentbacked facilities had “a direct positive effect on the liquidity and capital situation” of the Swiss lender. “There are very specific criteria that need to be met for CS to write down its AT1 bonds under a Viability Event, and there appears to be a real question about whether all of these criteria were met properly,” says RPC’s Crompton. Teo of Drew believes the emergency ordinances – issued by the Swiss government to give Finma a “clearer legal basis” to wipe out the bonds - speak volumes to the viability, or lack thereof, of the contractual conditions justifying the action. “If (CS’) contractual entitlement to do so were clear, it would not have been necessary for the Swiss Federal Council to pass the emergency ordinance to empower Finma to order the write-down and for Finma to do so accordingly,” points out Teo. He also notes that even CS reportedly disputed privately that a “Viability Event” had been triggered to warrant a write-down. “This lends support to the view that the contractual conditions for the write-down had not been met,” notes Teo. Adds Withers’ Leong: “While there may be a contractual provision in the bond documentation that allows for the AT1 bonds to be written down, the law could in some instances imply or read provisions into the contract. It would also likely be important to understand whether the power to write down was exercised reasonably and within the applicable legal limits.” Going forward, Teo’s team will likely be filing supplemental submissions and expect Finma and CS to respond to the appeals. “Should the appeals be successful, and depending on the grounds of the Court, this case may provide useful guidance on how AT1 bonds are dealt with in similar situations in the future,” says Teo. And as a key takeaway, Leong suggests that investors should consider “the relevant provisions in their documentation, and ideally have a sense of the applicable dispute resolution options arising from any potential disputes on their investments” to shun a repeat of similar predicaments. The logo of Credit Suisse is pictured on a building in Zurich, Switzerland, April 4, 2023. REUTERS/Pierre Albouy