How Credit Suisse Brazenly Kills CoCos

Credit Suisse wrote off $17 bln CoCos bonds. Quinn Emanuel prepares the class action. Can this lead to another "Big Short"-like documentary someday?

As you may have heard, the Swiss financial regulator told the tops of Credit Suisse that they were being sold to a competitor — UBS. Then the regulator called UBS and said they were buying Credit Suisse for $3+ billion.

Credit Suisse is the second largest bank in Switzerland — a state where public transport is more accurate than an atomic clock. A state that was able to maintain neutrality in two world wars has a super stable currency and the most expensive McDonald’s I’ve ever been to.

And suddenly, a bank with more than a hundred years of history, a symbol of the financial stability of the entire country, is going sideways.

All that remained was to find out what the cocos were for.

How come?

Credit Suisse has had a long and difficult journey before going down the dumper.

Eight months ago, the Financial Times published a video investigation about the bank’s large-scale embezzlement over the past few years. Watch it, there are fraudsters of the Medoff’s level, investments in artificial intelligence with consequences close to Enron, financing of warships for Mozambique through the Russian VTB, drug trafficking, public scandals of the tops of the bank because of the size of the houses, and other unpleasant events for a respectable institution.

I do not rule out that one may get at any bank, and even more so, a bank with a century-old history. Therefore, it is not worth demonizing Credit Suisse just yet.

How the takeover will happen

In that video, the most obvious end of the FT situation was seen as their takeover by UBS — Switzerland’s largest and much more conservative bank. Therefore, the decision was definitely prepared in advance and did not become news to any of the parties to the deal.

Under the terms of the deal, Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares.

Credit Suisse is represented by Sullivan & Cromwell and Cleary Gottlieb in this largest banking deal of 2023 so far. Freshfields, Clifford Chance, Davis Polk & Wardwell, and Fried Frank work for UBS. Latham & Watkins is acting for Morgan Stanley, which is acting as financial advisor to UBS in this deal.

But the most interesting work will be done by Quinn Emanuel, and here it is.

And what about cocos?

CoCos or Contingent Convertibles, or Additional Tier 1 bonds (АТ1) are bonds that work very similarly to a convertible loan, with the difference that the conversion into shares does not take place at the lender’s decision but automatically at the moment when the bank ceases to comply with banking regulations from liquidity.

For the bank, this is a convenient tool for improving liquidity because all bond debt is automatically converted into shares. Well, the holders of such bonds receive a higher premium for such risky bonds compared to other bonds. I advise you to read in detail what it does and how it works on Investopedia.

And in the process of the takeover, two things became clear: Credit Suisse issued such bonds in the amount of approximately $17 yards, and instead of automatic conversion into shares, these bonds were simply written off.

To put it briefly, the changes to the bond issue prospectus, which allowed them to be written off, were made only on March 19. Here is a detailed analysis of the Quinn’s possible position.

Could this cause a financial crisis?

I still don’t understand why they did it. Perhaps this was a condition of UBS, or perhaps in this way, the regulator simply “postponed” the payment of part of the debt for the duration of the lawsuits, or Credit Suisse shareholders became in a position regarding the equivalent of a share exchange, and it was easier to write off the $17 billion than to negotiate.

CoCos gained popularity after the crisis of 2008 to support the liquidity of banks, and today they are issued in the amount of about 250 billion.

As soon as the idea of Credit Suisse to write off these bonds became known, the owners of coco bonds issued by other banks began to worry. The Washington Post examined whether distrust of CoCos could undermine the banking system. They write that confidence in CoCos has definitely been undermined, but the financial system must stand.

✍️Dima Gadomsky