UBS Group AG (UBS.US) faces legal challenges over AT1 reset! Swiss court opens door for claims against Credit Suisse AT1 bonds

An important ruling by a Swiss court has brought new hope to long-term holders of Credit Suisse bonds whose investments were wiped out when the Swiss banking giant UBS Group AG intervened in a government-brokered rescue deal. Around 3,000 investors claimed that the government's decree to write down 16.5 billion Swiss francs (approximately 20.5 billion US dollars) of additional Tier 1 (AT1) bonds issued in March 2023 was illegal and should be revoked, with the write-downs restored. The Swiss Federal Administrative Court ruled on October 1 in a lawsuit as a "test case" and in a statement released on Tuesday, indicated its support for the appeal by the plaintiffs and supported the revocation of the decree. However, the court stated that it had not yet made a formal decision on the request for "full restoration," and until the decision to revoke the decree is finalized, other cases are suspended for now. This means that any actual compensation may take several years. Wiping out the AT1 bond assets in the process of rescuing Credit Suisse was a highly controversial aspect of the Swiss government's measures to address the country's second largest liquidity crisis in the banking sector, as it is usually shareholders who should absorb losses, not bondholders. The Swiss government and the Swiss financial regulatory authority, Finma, argued at the time that investors should be aware of the conditions included in the bond "provisions." UBS Group AG declined to comment. Following the news, UBS Group AG's share price fell, dropping 3% to 31.45 Swiss francs (39.1 US dollars) on the Swiss stock market at 3:00 pm Zurich time. In US stocks, UBS Group AG's ADR (UBS.US) trading price fell over 2% after the US stock market opened. Following the court ruling, the prices of claims related to AT1 bonds quickly rose. Three individuals who saw the offers said that traders were willing to buy these claims assets for up to 22 cents per dollar, with the last offer before the court announcement being around 12 cents. Since being wiped out, Credit Suisse's AT1 bonds are no longer considered as "securities" assets with interest-paying obligations and terms that UBS Group AG must adhere to. Instead, traders and investors are trading claims for potential future compensation or trading the bonds themselves if they regain "securities" status in the future. Finma, the Swiss government, and the Swiss National Bankshares, Inc., which made the decision to write down part of Credit Suisse's AT1 bonds, can appeal to the Swiss Federal Supreme Court regarding this ruling. Concerns about how much additional capital UBS Group AG will eventually need and about the lawsuits related to AT1 bonds have been weighing on UBS Group AG's share price to some extent. Investors are generally worried that the bank's dividend may be affected, but despite this, UBS Group AG's ADR price has risen over 35% so far this year, outperforming the S&P 500. UBS Group AG's ADR has repeatedly hit new highs this year, and if the uncertainties regarding CET1 and AT1 cool down, the performance of UBS Group AG's share price may be stronger. Revoke, not restore The ruling injected new vitality into hundreds of claims. However, the decree has only been revoked, not "fully restored," so the time frame for any compensation or who will pay it remains unclear. First, they will have to wait for Finma, Swiss National Bankshares, Inc., and the Swiss government to likely appeal to the Supreme Court. Secondly, they must pursue a court ruling on the "restoration" of the decree, which must also be upheld by the country's Supreme Court in the face of any appeals. In other words, even if they win the first hurdle, investors must obtain a court ruling to "reverse/restore" the consequences of the write-downsuch as reinstating the bond's nature or confirming compensation. This "restoration/reversal" ruling would also be subject to appeal by the other party, and must ultimately be upheld by the Supreme Court to be enforced. The court stated in the ruling: "The property rights of bondholders have been severely interfered with, which should require a clear and formal legal basis. However, such a basis does not exist." The court also said that Finma and the government's invocation of provisions in Swiss banking law to oppose the plaintiffs' right to appeal was "too vague and cannot be used to cancel the rights of third parties."