UBS Shifts AT1 Bonds, Amid Credit Suisse $17B Loss Lawsuit

Key Takeaway

• UBS shareholders approve making AT1 bonds convertible into equity, a shift from Credit Suisse's loss-triggered write-downs.
• Hedge fund Appaloosa sues Credit Suisse over misleading financial health claims leading to a $17 billion AT1 bond loss.
• The lawsuit accuses Credit Suisse of misrepresenting its liquidity before the UBS takeover, under securities laws and New Jersey RICO.

Shareholder Vote on AT1 Bonds

UBS Group AG has taken a significant step in addressing investor concerns following the fallout from the Credit Suisse takeover. In a recent annual general meeting, shareholders approved a pivotal change regarding the bank's Additional Tier 1 (AT1) bonds. This decision will see the AT1 bonds issued since the acquisition of Credit Suisse become convertible into equity instead of being written down to zero if loss clauses are triggered. This move is a departure from the mechanism that led to substantial losses for Credit Suisse investors last year when their most junior bonds were permanently written down following the bank's takeover by UBS. The equity conversion mechanism, a feature added to UBS's AT1 offerings post-takeover, was contingent on shareholder approval to be activated.

Legal Battle Over Bond Wipeout

The backdrop to UBS's shareholder decision is a legal battle involving hedge fund Appaloosa LP, which has filed a lawsuit against Credit Suisse Group AG. The litigation stems from a $17 billion loss related to AT1 bonds that were rendered worthless in the wake of UBS's acquisition of Credit Suisse. Appaloosa, advising entities such as Palomino Master Ltd. and Azteca Partners LLC, alleges that Credit Suisse provided misleading information about its financial health, leading investors to purchase AT1 notes shortly before they were written down to zero. This lawsuit, filed in federal court in Newark, New Jersey, adds to a series of legal challenges following the dramatic collapse of Credit Suisse in March 2023.

Misrepresentation Claims

Central to the lawsuit is the accusation that Credit Suisse misrepresented its liquidity position as "very strong and ‘getting stronger’" during a period of significant financial turmoil, characterized by massive daily withdrawals. The plaintiffs argue that this misrepresentation influenced their decision to invest in AT1 bonds, which were subsequently devalued completely as part of the UBS acquisition. The legal action leverages securities laws and the New Jersey Racketeer Influenced and Corrupt Organizations Act (RICO), seeking unspecified damages for the substantial investment losses incurred.

Street Views

• Jeroen Julius, Bloomberg Intelligence (Neutral on UBS Group AG):

  "This approval could facilitate further AT1 issuance."