Regulators come under fire over Credit Suisse rescue deal

The Bank of England stepped in to ease bond market fears yesterday after a furious row erupted over the emergency takeover of Credit Suisse by UBS.

Holders of £14billion of convertible bonds were wiped out in the £2.6billion deal, meaning they were left worse off than shareholders. 

That prompted the threat of legal action, amid warnings that the move could make it harder for other lenders to raise new funds on debt markets.

The Bank of England joined European regulators in assuring investors that they would take a different stance – helping to calm a sell-off on bank bonds after the deal was announced.

The row centres on investors who held so-called AT1 bonds in the collapsed Swiss lender.

These are a type of debt investment created in the wake of the financial crisis which can, if a lender gets into trouble, be converted into shares.

Bondholders would normally be expected to rank above shareholders in dividing up the meagre remnants of a collapsed bank.

Yet the structure of the Credit Suisse takeover announced on Sunday night meant that AT1 bonds valued at £14billion would be reduced to zero. 

Shareholders will receive £2.6billion under a deal which values their holdings about 60 per cent lower than Credit Suisse’s closing price on Friday. But they still avoid being wiped out altogether.

The bank’s AT1 bonds contained a clause allowing Swiss authorities to write them off if the bank became unviable, regardless of what happened to shares – a clause which analysts said is not typically included in European bonds. 

Michael Schulman, chief investment officer at Running Point Capital Advisors, said: ‘It’s going to make the AT1 bonds more expensive for all the other banks going forward, because now everyone else is going to see this extra risk.’

Patrick Kauffmann, a fixed income portfolio manager at Aquila Asset Management, told the Financial Times the move was ‘insane’, adding: ‘In my eyes, this is against the law.’

Law firm Quinn Emanuel said it had assembled a team of lawyers from Switzerland, the US and the UK who were in discussions with investors representing a ‘significant percentage’ of the AT1 bond holdings. 

UBS said the decision to write down the bonds was taken by Swiss regulator Finma, in order not to create a fresh liability for the bank.

The response by the Bank of England, together with the European Central Bank and other EU bodies, highlighted cracks in what otherwise has been a global consensus between regulators about the emergency Swiss deal.

The Bank said: ‘The UK’s bank resolution framework has a clear statutory order in which shareholders and creditors would bear losses in a resolution or insolvency scenario.’

EU regulators said they would continue to impose losses on shareholders before bondholders.