“I did not expect a complete failure”

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Nick Vogel* (67) is a board member of an insurance company and one of the many victims of CS emergency rescue. In his case, the 200,000 francs he had invested in AT1 bonds, called “coconut bonds,” became worthless overnight.

“I would never have thought that if I did nothing, my system would be wiped,” Vogel says. As a finance professional, he is knowledgeable about investment vehicles and has certainly not invested naively. Four years ago, the asset manager recommended AT1 bonds.

There was a high interest rate of 7.5 percent, for which at least 200,000 francs had to be committed. “The risk was also explained to me: if the issuer’s core equity ratio falls below a certain level, my bond can be converted into equity without my consent.” Vogel was aware that there was a risk of default and that his bonds could suddenly become underpriced stocks.

But a complete copyist? “I never expected a complete failure, especially given the ‘too big to fail’ rule,” Vogel says.

rain of complaints? Not for now!

As Coco Bonds are currently being sold in Switzerland for 5,000 francs, not only institutional investors but also many private investors are affected. However, class action lawsuits are not allowed. Solution: an example case. If such a case is successful before a Swiss court, there is a plan for further private cases with a good chance of success later on.

But who strives for one? The Swiss Investor Protection Association (SASV), founded in the summer of 2021, is examining the possibilities. Its Secretary-General, Arik Röschke, 38, explains to Blick that SASV is in contact with various law firms to see if there is any chance of a successful lawsuit. It is important how the lawyers defend the plaintiff and the defense and how the Swiss public perceives the issue.

Röschke does not expect a “flood of complaints” for now. “Large institutional investors have to sue, even for due diligence,” he says. These individually check their luck, smaller investors get free help from SASV, among other things. Because the matter is complex, Röschke assumes that cases will only be opened shortly before the deadline. “The period to file a lawsuit is three years.” There is no reason for injured parties to rush into a lawsuit that could involve high costs without a clear chance of success.

What could be fair?

CS emergency rescue sets a precedent. According to Röschke, Coco Bonds have already been copied in connection with other bank bailouts, for example Austrian Hypo Alpe Adria, Irish Anglo Irish Bank and Spanish Banco Popular 2017. Total loss where CS was not mentioned.

Subsequent lawsuits in Spain have mostly been about why, contrary to standard practice, bondholders lose their money before shareholders. The answer to the same question in Switzerland is that Credit Suisse did not go bankrupt but was bought by UBS. In addition, the prospectus for AT1 bonds states that the financial market supervisor (Finma) has the right to wipe out AT1 bonds in an emergency, or they expire if the government aids a bailout.

However, questions remain unanswered for Röschke: It seems that UBS was allowed to simply write off the 16 billion francs of CS debt in the form of these Coco Bonds instead of taking over at a mere 3 billion franc purchase price? Why were Finma and the National Bank still giving signals of confidence about their capitalization four days before the collapse of CS and many investors were still buying CS Coco Bonds on top of that? And how bad were these events in terms of the Swiss financial center and the trust placed in Coco Bonds?

Coco Bonds recover

Vogel believes the federal government’s action was a “disaster” for the Coco Bonds business: “This market is now likely to collapse sharply.”

In Switzerland, Zürcher Kantonalbank (ZKB) and Raiffeisen also issue Coco Bonds. ZKB spokesman Marco Metzler confirmed that AT1 bonds initially lost about 5 to 7 percentage points. “There were more buyers again last week and prices recovered a bit.” He then adds: “The fact that many investors realize the risks of CS AT1 bonds is illustrated by the fact that they were only one-third of their original value even before CS was acquired.”

Was the investment risk sufficiently clearly stated or was it an illegal offset? This is exactly what the courts need to clarify.

*Name changed

Source :Blick