1.
INTRODUCTION
In March 2023, after the Swiss bank Credit Suisse
published its financial report for 2022 and announced a loss of 7.3 billion
Swiss francs and Saudi National Bank, which bought 9.9% of the bank's shares
for 1.4 billion Swiss francs in 2022, announced that it would not make new
investments in the bank, Credit Suisse's shares fell 40% in a week and the bank
entered an economic crisis. [1]
In the first stage of the crisis, it was announced
that the bank would get a loan of 54 billion dollars from the Swiss Central
Bank. During this process, a part of the bank's shareholders filed a lawsuit
against the bank and bank officials, claiming that they had deceived the
shareholders by withholding information about Credit Suisse's financial
situation revealed by internal audits. [2]
Subsequently, UBS, which is the largest bank in
Switzerland, announced that Credit Suisse was planning to acquire the bank in
order to exit the crisis and that the negotiations were being conducted by the
Swiss Ministry of Finance, the Swiss Financial Markets Regulatory Authority
(FINMA) and the Swiss Central Bank and that the sale process would be realized
with the support of these institutions. Within the agreement, Credit Suisse
shareholders will receive 1 UBS share for every 22.48 shares in Credit Suisse,
making the value of each share in Credit Suisse CHF 0.76 and the total sale
price of CHF 3 billion. [3]
FINMA announced that the merger of Credit Suisse with
UBS will be financially supported by the government, which will write off
Credit Suisse's AT1 bond debts by reducing the value of Credit Suisse's AT1
bonds ("additional tier 1 bonds") with a nominal value of approximately
CHF 16 billion to zero, thus increasing the bank's tier 1 capital. [4]
After the sale of the bank for CHF 3 billion, it was
understood that the holders of AT1 bonds would not receive anything under the
agreement, unlike the shareholders. AT1 bonds were written down, whereas shareholders
would obtain a certain amount from the sales prince as a proportion of their
shares. As a result, AT1 bond holders took legal action. [5]
In this article, firstly, we will briefly explain the
scope, development, and function of AT1 bonds. Then, we will try to explain how
the write-off of AT1 bonds can be the subject of a dispute by looking at the
public debates that have taken place so far. In the last section, we will
evaluate whether the holders of AT1 bonds, whose investments have lost
significant value, can subject their losses to investment arbitration.
2. WHAT
ARE AT1 BONDS (COCO BONDS OR CONTINGENT CONVERTIBLE BONDS)?
AT1 capital instruments, referred to as CoCo bonds
("contingent convertible bonds"), are investment instruments
introduced in the Europe market after the global financial crisis in 2008. In
the ordinary course of business, investors holding CoCo bonds are paid coupons
just like any other bondholder. However, in case of financial distress, to ease
the bank's balance sheets, the coupon payments on these debt securities can be cancelled,
converted into shares or written off from the balance sheet by writing off
losses to investors. [6]
The aim of AT1 bonds is to create an extra buffer
against shocks in the event of bank failure, increase the resilience of the
banking system and reduce the threat of systemic risk. [7] Thus, in the event
of a bank failure, the cost of bankruptcy would be borne primarily by the
investors holding these bonds, rather than the taxpayers. [8]Therefore, AT1 or
CoCo bonds are considered as risk transfer instruments to mitigate the
devastating effects of banking crises. [9]
AT1 bonds are the riskiest bonds offered by banks and
are issued with the promise of high yields. The risk taken in exchange for this
high yield is the assumption of losses in the event of bank failure. [10] The
size of the AT1 bond market in Europe is approximately €250 billion. [11]
3. CAN
CREDIT SUISSE BE SUED FOR WRITTEN OFF AT1 BONDS?
As explained above, AT1 bonds are designed as risky
investment instruments and it is known that in the event of a crisis, they may
be written off from the balance sheet and the bondholders will bear the related
losses.
Then why did the authorization of FINMA to write off
AT1 bond debts as part of the merger between UBS and Credit Suisse [12] provoke
a backlash and lead AT1 bondholders to explore their legal remedies?
The main argument here is that the hierarchy of
loss-sharing has been broken down. [13] It is argued that the hierarchy between
shares and AT1 securities is violated when the value of the shares is
maintained at 0.76 Swiss francs as a result of the allocation of the consideration
from the sale of Credit Suisse to the shareholders, while the AT1 bondholders
lost their investment completely by reducing the value of their securities
amounting to 16 billion Swiss francs to zero. This reduction happened despite
that it is accepted that the creditor of debt securities (bonds or bills) will
normally take precedence over shareholders in the priority of collection. [14] After
the 2008 crisis, within the framework of international banking principles and
rules developed after the crisis, the fact that AT1 bondholders did not receive
any payment on the grounds that there was a precedent based on the superiority
of AT1 bonds over shares was criticized and characterized as a punishment of
investors. [15] Within this framework, the holders of AT1 bonds started to
investigate their legal remedies. [16]
In the face of these allegations, FINMA's defense was
that there was a contractual basis for the write-off of the AT1 capital
instruments issued by Credit Suisse and that the contractual relationship
permitted the write-off, especially in cases of extraordinary financial support
by the state. Since it was agreed by the Swiss government to grant a liquidity
support loan to Credit Suisse on March 19, 2023, these contractual conditions
regarding the bank's AT1 capital instruments were satisfied. [17] According to
FINMA, based on the fulfilment of these conditions, the decision to write down
the AT1 bonds was lawful.
Previously, AT1 bonds were written off in Spain in
2017 when Santander Bank acquired Banco Popular for €1. Banco Popular was on the
verge of bankruptcy back then, and the rescue operation of this bank and the
write-off of AT1 bonds were challenged in court. [18] However, the main
difference between the Banco Popular and Credit Suisse bailouts is that in the
former, shareholders and AT1 bondholders were both losers, whereas in the
latter, AT1 bondholders were the sole losers.
4. CAN
AT1 BONDHOLDERS RESORT TO INVESTMENT ARBITRATION?
In exploring the legal remedies available to holders
of AT1 bonds, we look at (i.) against whom and (ii.) before which jurisdictions
they may bring claims. Public discussions suggest that these claims could be
brought against Credit Suisse, UBS, FINMA and/or the Swiss government. It is
also seen that these options are generally discussed within the scope of
application to national courts. [19]
Another option that is not discussed as much as these
options is international investment arbitration. It would be possible for AT1
bondholders who are not Swiss citizens to resort to international arbitration
against the Swiss state. This is an alternative to national courts, by which natural
or legal persons who are not Swiss nationals but are foreign investors would be
the applicants. Foreign investors will apply to international investment
arbitration based on the investment treaty concluded between the Swiss state
and the states of which they are a citizen.
Agreements on the Mutual Promotion and Protection of
Investments (AMPPI) are international agreements concluded between states for
the mutual promotion and protection of investments made by natural or legal
persons of one contracting state in the territory of the other contracting
state.
The concept of investment is defined in these
agreements as any asset owned or controlled directly or indirectly by the
investor. In this context, shares, bonds, investment income, monetary
receivables, other financial rights that may be derived from the investment,
movable and immovable property, real rights such as mortgages, liens, pledges,
industrial and intellectual property rights such as copyrights, patents, licenses,
industrial designs, technical processes, as well as, but not limited to,
trademarks, know-how and other similar rights with material value may be
considered as investments. Although the concept of investment is broadly
defined in this way, in some bilateral investment treaties, this scope may be narrowed,
and a more limited number of activities may be considered investments under the
treaty. [19]
Turkey has bilateral investment treaties in force with
a total of 85 countries. [20]
In these agreements, issues such as "determining
the limits of the treatment to be applied to the investor by the host country,
protecting the fundamental rights and interests in the investee countries on
the basis of international law, securing profit transfers, determining the
conditions of possible expropriation by the host state and resorting to
international arbitration in case of dispute" are reciprocally set out.
[21]
Some of the provisions in the AMPPI that provide
protection to investors are as follows: Pursuant to the nationalization,
expropriation and compensation article, in cases of direct or indirect
expropriation and interventions resulting in expropriation by the host state,
the investor is protected against the damages caused by these interventions and
has the guarantee that these damages will be effectively and adequately
compensated and paid to him. In arbitration proceedings based on this clause,
states are condemned to pay substantial damages unless they prove the existence
of an absolute public interest. [22]
The full protection and security clause obliges the
host state to protect the foreign investment from adverse treatment by itself,
its institutions or third parties. Under this provision, legislative and
administrative changes may constitute a violation of the principle of full
protection and security.
Pursuant to the most favored nation treatment clause,
the two contracting states undertake not to provide each other's investors or
investments with less privileged and favorable treatment than that accorded to
investors or investments of a third country that is not a party to the treaty.
Accordingly, both states parties to the treaty will be obliged to grant to each
other the same rights that they grant to the other states parties to other AMPPI
that they have concluded, and investments and investors of the other state will
be able to benefit from the most comprehensive rights granted to any country.
Therefore, in the event of a dispute, not only the agreement concluded by the
parties, but also other AMPPIs will be taken into account.
Under the national treatment clause, states parties to
the treaty guarantee that they will not grant less favorable treatment to an
investor of the state party to the treaty than they grant to their own
investors. In all their regulations and practices, states shall treat all
investments equally, without any distinction between domestic and foreign
investments, so that the foreign investor is in a position to compete with the
host country's own investors.
The arbitration clause allows for disputes concerning
the interpretation or application of the treaty to be resolved through
international arbitration. This allows investors to resort to international
arbitration without being subject to the courts of the host country.
Under the AMPPI, persons or companies that invest in
AT1 bonds and hold AT1 bonds that are not Swiss may also be considered as
foreign investors. Accordingly, the bailout operation carried out by the Swiss
public authorities for the acquisition of Credit Suisse, and the devaluation of
AT1 bonds in this process, may be subject to investment arbitration and
international arbitration may be initiated against the Swiss state with claims
for payment of the value of the investment, compensation for damages, etc. in
accordance with the relevant articles of bilateral investment treaties, particularly
by referring to the expropriation article.
Resorting to international arbitration instead of
national courts for the resolution of this dispute has some advantages for the
investor. First of all, in arbitration, the dispute is resolved by arbitrators
appointed by the parties, who are experts in finance and banking and have
experience in similar disputes.
Secondly, if the dispute is heard before the courts of
the respondent state, there is always a risk that a decision will be rendered
in favor of the state and against the foreign investor. It can be argued that
this risk is reduced when the dispute is resolved by an arbitrator or arbitral
tribunal with international members. Thirdly, arbitration offers a wider range
of opportunities to the applicant compared to national courts, both in terms of
the procedure and the means of proof available to the investor.
Fourthly, arbitral proceedings are shorter than
proceedings before national courts.
Considering that even the European Union central and
supervisory authorities in the member states have openly criticized the Credit
Suisse operation and the write-off of AT1 bonds carried out by the Swiss public
authorities on the grounds that, contrary to the hierarchy, the damage was
primarily imposed on the AT1 bondholders [23], it would be useful for AT1
bondholders to consider the option of resorting to international investment
arbitration against the Swiss state.
Att. Erse Kahraman
References:
1.https://www.haberturk.com/167-yillik-finans-devi-eriyor-credit-suisse-de-panik-3573864-ekonomi
2.https://www.reuters.com/legal/credit-suisse-is-sued-by-us-shareholders-over-finances-controls-2023-03-16/, https://www.dunya.com/finans/haberler/panik-buyuyor-credit-suissee-54-milyar-dolarlik-destek-haberi-688482
3.https://www.ubs.com/global/en/media/display-page-ndp/en-20230319-tree.html
4.https://www.finma.ch/en/news/2023/03/20230319-mm-cs-ubs/
5.https://www.reuters.com/business/finance/credit-suisse-bondholders-seek-legal-advice-at1-wipe-out-2023-03-23/, https://www.dunya.com/dunya/credit-suisse-at1-tahvil-sahipleri-kayiplari-icin-olasi-yasal-yollari-degerlendiriyor-haberi-689020
