On March 19, 2023, the Swiss Financial Market Supervisory Authority (FINMA) approved a transaction resulting in UBS's takeover of Credit Suisse (CS), which included a complete write-down of CHF16 billion in Additional Tier 1 (CS AT1) bonds. This action prioritized shareholders over bondholders in the capital hierarchy, leading to significant shockwaves through financial markets. This article delves into the broader implications of this decision within the context of Switzerland's robust network of Bilateral Investment Promotion and Protection Agreements (BITs) and explores the potential legal avenues for relief available to investors.
- How Does Switzerland's Investment Treaty Landscape
Impact Credit Suisse Bondholders?
Switzerland has signed over 120 BITs with countries in Africa, Latin America, Asia and Europe, positioning itself as the country with the third largest network of such agreements globally, following Germany and China. These BITs aim to enhance legal security, improve the investment climate, and increase Switzerland's attractiveness as an international investment location. The agreements protect against non-commercial risks such as state discrimination, unlawful expropriation, and restrictions on payments and capital flows. Recent developments in Swiss BIT practice emphasize sustainable development and include provisions to ensure transparency in investor-state arbitration, highlighting Switzerland's commitment to fair and equitable treatment of foreign investments.
- What Role Did FINMA Play in the AT1 Bond
Write-Down?
FINMA justified the CS AT1 bond write-down based on a "Viability Event" triggered by extraordinary government support extended to CS. This unprecedented decision, while grounded in contractual clauses, diverged from traditional financial norms where bondholders typically precede shareholders in loss absorption, raising questions about regulatory fairness and predictability.
- How Has the Market Reacted to Regulatory Decisions
Post-Takeover?
The market's adverse reaction underscores concerns about the stability and transparency of Swiss regulatory actions. This situation brings to the forefront the necessity of aligning domestic financial decisions with international expectations and Switzerland's commitments under its BITs.
- What Are the Fair and Equitable Treatment Claims
Against FINMA?
Given the swift and unanticipated nature of the CS AT1 bond write-down, affected investors could claim a breach of the fair and equitable treatment (FET) standard stipulated in applicable BITs. Such claims would argue that FINMA's actions lacked transparency and disproportionately favored shareholders, violating the equitable treatment expected under Swiss treaties.
- Can Investors Claim Indirect Expropriation Due to the
AT1 Write-Down?
Investors might also pursue claims of indirect expropriation, contending that the write-down deprived them of their investment returns without proper procedural fairness or compensation, as mandated by Switzerland's BITs. The deadline for filing claims against expropriation in Switzerland is five years, starting from the date of knowledge of the legal act of expropriation.
- How Do Recent Enhancements to Switzerland's BITs
Affect Potential Claims?
Switzerland's recent emphasis on sustainable development and transparency in its BITs may also influence how these treaty obligations are interpreted in potential disputes, potentially providing a broader basis for challenging the regulatory decisions under international law.
- How Are Damages Assessed for the AT1 Bond
Write-Down?
The determination of damages would involve calculating the potential outcomes had the CS AT1 bonds not been written down. This might include assessing the financial trajectories of these bonds based on market conditions prior to the takeover announcement. - What Remedies Are Available to Investors for Recovering
Losses?
International arbitration against Switzerland/ Swiss Confederation could offer a venue for recovering these losses, with damages potentially reflecting the difference between the bonds' market value before the event and their zeroed value post-takeover.
The takeover of Credit Suisse by UBS and the subsequent CS AT1 bond write-down present a complex case of how national regulatory actions intersect with international investment protections. This scenario tests the boundaries of Switzerland's commitments under its extensive network of BITs and raises important questions about the alignment of domestic financial regulations with international legal standards.
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