Pension funds exposed to written-down Credit Suisse Additional Tier 1 (AT1) bonds risk becoming entangled in a lengthy legal battle, as the value of claims on the wiped-out instruments continues to surge.
The CHF16.5bn write-down of Credit Suisse’s AT1s, ordered by the Swiss Financial Supervisory Authority (FINMA) as part of UBS’s recent takeover, remains highly contested.
The Swiss Federal Administrative Court ruled this week that the move was unlawful – prompting FINMA to appeal to the country’s highest court (Bundesgericht), paving the way for years of litigation.
A person familiar with the matter said the ruling was a “positive signal” for investors in AT1 bonds.
“The rule of law has been restored. FINMA has now appealed to the highest court. UBS is likely to also appeal within the 30-day period,” the source said. UBS declined to comment on the decision or the pending appeal.
Jérémie Boudinet, head of financial and subordinated debt at Crédit Mutuel Asset Management, said the case underlines the complexity and risk of investing in subordinated debt.
“The AT1 bond market is not suitable for every investor; it is a risky market. The key lesson is that this market cannot be approached in the same manner as other markets,” he said. Recovering assets in the event of losses implies fighting in court for years, he added.
Vincent Kaufmann, chief executive officer of the Ethos Foundation, said the ruling confirms that AT1s are subject to “considerable legal uncertainty” – contradicting their intended role as crisis management tools.
Boudinet said UBS AT1 bonds are “an absolute no-go for now”, noting that Switzerland’s efforts to tighten liquidity regulation on UBS could include suspending coupon payments, adding to the risk amid ongoing legal uncertainty.
Pension funds hold their ground
Despite the legal fallout, some Swiss pension funds remain committed to the asset class. Migros Pensionskasse, which lost CHF100m in the Credit Suisse write-down, still holds AT1 bonds in a hybrid sub-portfolio.
“Despite the recent write-down of Credit Suisse’s AT1 bonds, this sub-portfolio of our hybrid bonds has performed better over the long term than supposedly low-risk investments in Swiss bonds,” said CEO Christoph Ryter.
Ryter said the fund’s solid funding ratio of more than 134% and long-term portfolio volatility of 4.6% – lower than that of Swiss bonds – provide sufficient protection against market shocks. “We see no reason to change our strategy due to the write-down of a security, which we also believe was carried out illegally,” he said.
“We see no reason to change our strategy due to the write-down of a security, which we also believe was carried out illegally”
Christoph Ryter, CEO of Migros Pensionskasse
According to Crédit Mutuel’s Boudinet, pension funds often gain AT1 exposure indirectly, through specialised funds or ETFs, rather than holding the bonds directly. The key question now, he said, is how investors should treat AT1s that have effectively become claims in a potential settlement.
Claims on the written-down Credit Suisse AT1 bonds have surged on the secondary market, rising from around 12 cents on the dollar to about 30 cents following the court’s ruling, according to Bloomberg. On the day of the write-off, they traded at just one cent.
“The patience of pension funds and asset managers may be rewarded, because the value of the claims has increased and could continue to do so,” said Boudinet. However, he cautioned that this is a very niche market, with few counterparties such as Goldman Sachs and Stifel currently trading the claims.
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