credit suisse fixed income investor presentation (march 14)

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Investors gear up for litigation over Credit Suisse write-down

Avenues could include challenging the Swiss government, suing FINMA, or suing Credit Suisse – with AT1s recovering slightly as the market prices in the hope of legal redress .   

The write-down, announced the evening of 19 March before markets opened on Monday morning, has decimated the $250 billion AT1 bond market in Europe, with a cataclysmic impact on both market pricing and market liquidity. But with these instruments being held not only by hedge funds and institutional investors, but also distributed to smaller and retail investors, both Swiss and overseas, many players are now calling for urgent redress.  

Over 600 people joined a webinar on Wednesday hosted by Quinn Emanuel, “the most feared law firm in the world” (and one with a history of litigation against Credit Suisse), to explore their options with regards to litigation claims against both the bank as an issuer, and Switzerland as the enactor, of the recent AT1 bond write-down.  

Changing lanes  

The crux of the challenge would appear to be the special ordinance passed by the Swiss government on 16 March, prior to the merger being made official and without any announcement to investors or the public, which gave FINMA the authority to ignore the established enforcement of loss hierarchy in the event of a write-down.  

The emergency decree created a new law to enable the terms of the merger transaction (including the waiving of shareholder approval and the decision to place equity obligations above the rights of junior creditors) because under the existing ‘too big to fail’ Swiss legislation, it appears the deal in its current form may not have been possible.  

Article 19 of the Swiss Capital Adequacy Ordinance states that: “Common Equity Tier 1 capital shall absorb losses before the Additional Tier 1 capital,” and that: “Additional Tier 1 capital shall absorb losses before Tier 2 capital.” It also clarifies that: “Should individual instruments of the same capital component (outside CET1) absorb losses differently, the bank must specify this in its articles of incorporation or at issue of the instrument.

The new ordinance allowing FINMA to sidestep the established loss hierarchy is believed to have been adopted partly on 16 March and partly on 19 March, but was only made public on 19 March – crucially, after the merger was announced, and after the bond write-down was confirmed, the timing of which could become a key element in any court case.   

In addition, in the AT1 documentation for the bonds themselves, the law firm suggested that the definition of a ‘write-down’ event could also be challenged: as the requirements would seem to indicate that the bank had to be in danger of insolvency in order to trigger a write-down to zero (along with other factors).   

The fact that other regulators, including the European Central Bank (ECB) and the Bank of England, immediately distanced themselves from the Swiss decision and reaffirmed their commitment to the standard hierarchy for bank funding also indicates, said Quin Emanuel, that there could be international support for a challenge to Swiss law. So what avenues are available to investors?   

What can be done?  

One possibility mooted in the Quinn Emanuel webinar could be a legal challenge brought in Switzerland against the issuer (Credit Suisse) for mis-selling. Based on the bank’s fixed income investor presentation of 14 March 2023 in which it stated that its capital adequacy situation was sound and that liquidity issues had been addressed. Given that the bank did not disclose any issues that could have warned the market about adverse conditions, there could, suggested the firm, be a case to argue that any bonds traded/purchased in the period between 14 March and 19 March were based on inaccurate statements by Credit Suisse. The key point here would be the issue of market expectations regarding the terms of the prospectus versus the risk of ad hoc legislation: did Credit Suisse know about the new ordinance on 16 March and if so, were they under an obligation to inform their investors/bondholders of the possibility?  

Another avenue could be a claim against Switzerland itself – either the government and/or the regulatory agencies, notably FINMA. Any challenge to FINMA’s decision would need to be addressed in court within 30 days of the FINMA order, with Quin Emanuel suggesting that a challenge could be made on the basis of a violation of property rights and arbitrary exercise of discretion.  

The constitutionality of the 16 March special ordinance could also be challenged – and here, it would seem that the wheels may already in motion. The Swiss Parliament is apparently (said Quinn Emanuel) convening an extraordinary assembly, beginning 12 April, after Swiss government representatives demanded to discuss the emergency decree.  

“Apparently the government can’t just introduce new laws,” said one lawyer. “There is uproar in Switzerland right now, with people asking why they had a superb ‘too big to fail’ regulation for 10 years that everyone planned against, which was thrown away overnight to be replaced by a new regulation that took away rights and breached standard hierarchy. There is a lot of potential here for litigation, but there is also the option for political redress.”   

Other options are to take action against Switzerland in other countries, potentially based on bilateral investment treaties (BITs) – of which Switzerland has many, designed to protect the rights of foreign investments in the host country. Non-Swiss AT1 bondholders could plausibly base action on these, although they would have to be based in jurisdictions with Swiss BITs: such as Singapore, Hong Kong, the UAE, Saudi Arabia and Qatar.  

Swiss treaties – including BITs – usually contain requirements that any expropriation, nationalisation or “measures tantamount to expropriation” cannot be effected without compensation. The devaluation of AT1 bonds could potentially be viewed as a government measure of expropriation, suggested Quinn Emanuel, thus triggering an obligation to compensate bondholders. BITs require “fair and equitable” treatment of foreign investors, and also usually include a requirement to provide procedural fairness and transparency, which could be argued to include the honouring of legitimate expectations about the state’s laws that an investor reasonably had when making the investment. The emergency law passed to legalise the write-down could potentially, the law firm noted, be seen as a breach of that fair and equitable treatment standard: a challenge that could stand independently or in conjunction with an expropriation claim.  

There is some potential to make a claim in the US under either Federal or state securities law (such as California’s popular ‘blue-sky’ law). However, this would be more difficult – first, the Credit Suisse AT1 bonds were predominantly sold to US investors using the 144A exemption, meaning that they are exempt from registration with the SEC. That doesn’t mean the seller is immune to liability – claims can be brought under Rule 10b-5 if the plaintiff can prove that the seller knowingly made a misrepresentation that cause economic loss – but Credit Suisse would almost certainly argue that they didn’t know at the time of sale and therefore could not be liable for fraud. So although it would potentially be possible to bring a challenge in the US, in Quinn Emanuel’s opinion “these claims would face very serious challenges”.  

Urgent action, swift recovery  

Either way, the clock is ticking and investors will have to make some quick decisions on which path they choose to take. “We essentially have a 30-day window,” concluded a Quinn Emanuel lawyer. “There is a strong argument to get arguments together and get letters out quickly.”  

With multiple law firms currently pitching for work in the litigation stakes, it’s therefore likely that we could see some rapid movement – and this hope of redress has already worked some magic in the trading stakes.  

 “After an initial selloff, the AT1 bond market has recovered somewhat from the shock of the Credit Suisse write-down,” said Paul Summer, head of structured notes and financials trading at fixed income investment bank KNG Securities. “The affected Credit Suisse AT1 bonds are now trading at around 5% of notional value, as some investors see hope of a legal challenge.”  

Notably the Credit Suisse Tier 2 bond 6.5% 08/08/23 ( which was not written down even though it included bail-in language ) dropped to 60% but is now trading above 90%.  

Read More – Lone CoCo bond escapes the Credit Suisse carnage  

 “Investors in other AT1 bonds were comforted by comments from the EU and UK authorities that they would expect common equity instruments to absorb losses before AT1 is written down,” added Summer.   

“However, in our view, this will permanently affect the AT1 market, with investors having to pay much more attention to the terms and conditions of future new issues, and consequently demanding a higher interest premium.”  

The ripple effect  

And at the risk of being pessimistic, it’s not just the bond write-down that could cause a legal headache in the coming months.   

“When deposits are volatile and market confidence is uncertain, focus increases on banks’ tightening liquidity.  When liquidity tightens, we can expect to see an uptick in claims between banks and their customers and counterparties,” warned Charlotte Henschen, a partner in the commercial and banking litigation team at international law firm RPC.   

After the global financial crisis, for example, banks faced a tidal wave of litigation for mistreating customers. When times get tough, banks tend to get tougher – which can, suggested Henschel, result in actions which amount to a breach of their agreements with their clients as they seek to protect their own interests.  

“Litigation could arise from disputed margin calls, where customers consider that a margin call was invalid or unjustified, the parties dispute the valuation of the collateral posted,” she noted.  

“Banks may also be taking a close look at their exposure to customers and the adequacy of the security which they have in place. This may result in litigation where the parties disagree as to the valuation of such security, with arguments as to whether such valuations were previously inflated artificially.”  

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2022 Strategy Update

   Oc­to­ber 27, 2022

Event Start Time: 10:30 CEST / 09:30 BST / 04:30 EDT Event End Time: 12:45 CEST / 11:45 BST / 06:45 EDT

• Axel P. Lehmann, Chair­man of the Board of Dir­ect­ors
• Ul­rich Körner, Chief Ex­ec­ut­ive Of­ficer 
• Dixit Joshi, Chief Fin­an­cial Of­ficer

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Fixed Income investors see light at the end of the tunnel

Financial markets eagerly look beyond the recession. Yet Fixed Income Investors worry about default rates or liquidity. What does the future hold?

December 30, 2022

Andrew Jackson

Head of Fixed Income

We are deeply skeptical about the financial markets’ desire to “see past” the recession and view the world as if it were moving into the sunlit uplands. After many years of central banks implementing the unprecedented and coordinated Zero Interest- Rate Policy (ZIRP) alongside endless rounds of Quantitative Easing (QE), the “come down” feels both painful and protracted. As Fixed Income investors, we are worried about default rates, liquidity, and the loosening of credit terms and leverage over the past few years. We also acknowledge that certain aspects of our Fixed Income universe have further downside risk.

We do, however, believe that Fixed Income, more broadly, and the least risky parts, in particular, present outstanding value for risk for investors both in relative and absolute terms. In fact, we would go as far as to say that as we turn the page on the worst year ever for global Investment Grade Fixed Income and go into another year, there is the chance that 2023 will end up being the best year since 2009 for this particular sub-asset class.

Navigating through Fixed Income markets

This is the first in a series of short updates on Fixed Income markets written by the Credit Suisse Asset Management Fixed Income team. They will be concise, easy to read, focused on Fixed Income, and timely. Most importantly, these updates will express definitive views on Fixed Income markets. I also promise to give you my views through the lens of risk. To that end, I will kick off with my concerns over the short-term path for some of the higher risk parts of our asset class.

• While interest rates appear closer to their “end point” than their starting point, default rates have barely begun their journey, while the most exposed areas may need re-calibration. 
• Certain areas of the asset class have seen a healthy dose of capitulation, and some even a very unhealthy dose (Chinese Real Estate Debt). Others, however, have moved in a purely systematic fashion and face the potential for further downside (as in point 1, we believe that the lowest-rated parts of the asset class are most exposed here). 
• Lending conditions as well as affordability are likely to put further pressure on borrowers. 4. New asset classes such as private credit have never truly been tested in the furnace of a credit cycle. There are likely to be winners and losers in these spaces. The fact that these segments of the market are yet to see material drawdowns should not be seen as a sign that they are immune to the financial conditions that have placed such stress on more liquid markets. Indeed, less liquid parts of Fixed Income markets almost always lag their liquid counterparts in periods of stress. 

We note with interest that both lending standards and affordability trends are likely to accelerate the upward trend in default rates and credit stress. 

Bank Lending Standards vs. HY Spreads and Default Rates

US Housing Affordability Index

All that Fixed Income has to offer in 2023

With all this in mind, I am delighted to be able to tell you that not only do I believe that Fixed Income will be an attractive investment in terms of return for risk in 2023 but that it will also see:

• Material opportunities to deliver differentiated performance
• Reward good quality risk management
• Require ongoing vigilance, dynamism and discipline

All of the “bonus” characteristics mentioned above are long overdue for an asset class that has been predominantly driven by macro factors for large parts of the last decade. Those members of the Fixed Income community who have been conditioned like Pavlovian dogs to buy each dip have either been sent back to puppy school already or will be heading there at some stage over the next few years. The fun is certainly not over yet, folks!

To summarize, when it comes to our overall risk appetite within the asset class, we tend to deconstruct our view into the following: fundamentals, technical, value and tail risks. Our Risk Appetite (+2 from 0) has moved into positive territory off the back of the recent shifts that we have seen both in terms of Value (credit re-pricing) and the reduced possibility of further overshoot on inflation and rates. Although we will provide more details on this in future pieces, our current Risk Appetite view for the asset class as seen through this method is: 

Economic outlook

Recession fears and stubbornly high inflation coupled with expected energy stress over winter continue to provide an uncertain economic backdrop, but mild weather has eased concerns based on the latter.

Credit Fundamentals

Generally, fundamentals have started to deteriorate and are expected to weaken going forward as reflected by worsening credit metrics in earnings reports.

Valuation & Technicals

Most credit markets have priced-in a recession, which makes valuations look even more attractive. While investor positioning remains light, outflows of fixed income have started to slow.

Risk of a Fed overshoot remains, but has been reduced by potential pivot. Immediate effect of energy crisis has recently been softened by mild weather.

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What Fixed Income investors need to watch out for

Key take-aways within the underlying sub-assets classes and milestones to look for include:

• Investment Grade credit is much better value than sub- Investment Grade. 
• There will be overshoots on the journey towards a return to more “normal” levels. 
• Looking at the pure Interest Rate element of yields, we believe that we are approaching terminal rates within market-implied rates curves. 
• Pockets of underperformance will continue to persist where technicals are weak or where scar tissue exists; look for leverage or worse than expected liquidity conditions for clues as to where these may lie. 
• Flows are likely to be “home biased” for some time given where yields sit on relatively boring subsets of the asset class, eliminating the need to “hunt for yield”. 
• 2023 is likely to be a year in which Fixed Income receives a large uplift in asset allocations. 

In summary, we find ourselves against the backdrop of the market shifts seen last week, which are having an overall strongly bullish medium-term view on Fixed Income, but with significant bias towards simplicity and liquidity.

Against the backdrop of the inflation data and recent positive market moves, Credit Suisse Asset Management is maintaining a strongly bullish medium-term view on fixed income.

Our resources are limited. They should be used in a “clever, smart, efficient, and profitable” way, says Bertrand Piccard. Other scientists and pioneering entrepreneurs who appeared at this year’s Thematic Flagship ETH Conference agree and are also pursuing this goal.

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UBS's second-quarter 2023 results

UBS announces second-quarter 2023 earnings and decision to integrate Credit Suisse (Schweiz) AG

Ad hoc announcement pursuant to Article 53 of the SIX Exchange Regulation Listing Rules

Key highlights

Consolidated financials for 2Q23 and 1H23 include results for the former Credit Suisse business from 1 June 2023

• 2Q23 net profit of USD 29bn including USD 29bn of negative goodwill from CS acquisition to sustain USD 238bn assumed RWA; underlying1 PBT of USD 1.1bn, of which USD 2.0bn from the UBS sub-group
• Strong capital position maintained with CET1 capital ratio of 14.4% and CET1 leverage ratio of 4.8%
• Credit Suisse (Schweiz) AG to be fully integrated following a thorough evaluation focused on creating lasting value for all stakeholders; closing of legal entity merger expected in 2024
• Credit Suisse AG reports a 2Q23 US GAAP pre-tax loss of CHF 8.9bn ; CHF 4.3bn excluding acquisition-related effects; adjusted pre-tax loss of CHF 2.1bn1
• Credit Suisse franchise broadly stabilized with net deposit inflows of USD 18bn in 2Q23, momentum continuing into 3Q23
• UBS Global Wealth Management recorded highest second-quarter net new money in over a decade at USD 16bn, momentum continuing into 3Q23
• Non-core and Legacy perimeter defined with clear plans to substantially reduce capital consumption by year-end 2026 with USD 9bn in RWAs exited in 2Q23
• Plans to achieve greater than USD 10bn gross cost reductions , C/I ratio of <70%, and RoCET1 of around 15% exit-rate 2026

UBS’s 2Q23 results materials are available at ubs.com/investors – The audio webcast of the earnings call starts at 08:30 CEST, 31 August 2023. A definition of each alternative performance measure, the method used to calculate it and the information content are presented under “Alternative performance measures” in the appendix to our 2Q23 report. The reconciliation of reported and underlying performance is presented in the appendix of our 2Q23 results presentation. Information in this news release is presented for UBS Group AG on a consolidated basis unless otherwise specified. 1 Excluding negative goodwill, integration-related expenses and acquisition costs 2 Credit Suisse’s media release is available at https://www.credit-suisse.com/about-us/en/media-news/media-releases.html  

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A year on from Credit Suisse's rescue, banks remain vulnerable

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Reporting by Stefania Spezzati in London and Oliver Hirt in Zurich; additional reporting by John O'Donnell in Frankfurt, Jesus Aguado in Madrid and Noele Illien in Zurich. Editing by Elisa Martinuzzi and Susan Fenton

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Stefania is an award-winning reporter who covers European banking at Reuters. Based in London, she chronicles all things finance, breaks news and digs deep into the world's biggest banks. Born in Puglia, Italy, Stefania started working as a financial journalist in Milan for MF-DowJones, a newswire backed by Dow Jones and Milano Finanza. Prior to joining Reuters, Stefania spent about a decade at Bloomberg News, in Milan and London. In 2022, she co-led an investigation which through data journalism exposed how over 130 million pounds in taxpayer-backed loans went to firms with dubious credentials. The story won at the British Journalism Awards in crime and legal affairs journalism.

Nasdaq resolves two hour-long technical glitch impacting connectivity

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German investor Klaus-Michael Kuehne is in talks about a possible 100-million-euro ($109.02 million) loan for property company Signa Prime, a source familiar with the matter told Reuters, confirming an earlier report by Bloomberg.