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Last Minute Deals

The Credit Suisse-UBS deal created some big problems for bondholders.

Ludo Lugnani profile image
by Ludo Lugnani
Last Minute Deals

Hi ZipLawyer! I'm Ludo Lugnani and this is ZipLaw: an independent newsletter covering unique news stories. We explain how each story impacts law firms and their clients so that you can stand out in interviews and applications and develop your Commercial Awareness!

Today’s edition is a ~6 min read:

  • πŸ’Έ Last Minute Deals: The Credit Suisse-UBS deal created some big problems for bondholders.
  • βž• Plus: Xi and Putin meet up, Macron survives a no-confidence vote and IMF approves bailout for Sri Lanka.
  1. 🌍 China and Russia: Xi Jinping invites Putin to visit China amid talks in Moscow about China's plan to end the war in Ukraine. Japan's Prime Minister Kishida visits Ukraine for the first time to discuss with President Zelensky.
  2. πŸ‡«πŸ‡· France's pension reforms: Macron's government survives two no-confidence votes to push through pension reforms raising the retirement age from 62 to 64, sparking nationwide protests. Macron's approval rating drops to 28%, lowest since 2019.
  3. πŸ’° First Republic's credit rating: The American bank's share price almost halves following credit rating cut and depositors' withdrawals. Big banks consider a new plan after depositing $30bn last week failed to calm anxiety.
  4. πŸ’΅ IMF's bailout for Sri Lanka: $3bn bailout approved for Sri Lanka, facing an economic crisis due to Russia's invasion of Ukraine and government mismanagement. Loan will be issued in nine tranches, conditional on reforms and public debt restructuring.

Last Minute Deals

Briefly: Over the weekend, we witnessed a groundbreaking bank deal - probably the most significant since the 2008 financial crisis. UBS agreed to acquire its rival, Credit Suisse, for a whopping $3.2 billion. Swiss regulators stepped in to save the nation's second-largest bank, and that's where the drama unfolded.

The Unexpected "Plot Twist": Investors holding Credit Suisse's additional tier 1 (AT1) bonds faced a jaw-dropping surprise: their bonds were completely wiped out in the deal. This unusual turn of events left many investors outraged, and some are even claiming that the decision is illegal. Now, law firm Quinn Emanuel Urquhart & Sullivan is in talks with a large block of debtholders about possible legal action.

A Risky Game: AT1 bonds, also known as contingent convertibles or "cocos," were introduced post-2008 to strengthen bank balance sheets and avoid taxpayer-funded bailouts. Since then, they've grown into a massive $260 billion market and become a critical part of European banks' capital structures. What makes this case unusual is that shareholders are walking away with $3.2 billion, while bondholders receive nothing.

Also worth noting:

  • AT1 bonds are known to be risky, and the offering documents made no assurance that equity would be wiped out first. A contractual provision even states that AT1s can be written down if the issuer (Credit Suisse in this case) is deemed "non-viable."
  • This debacle could end up in court, raising questions about the effectiveness of AT1s in bolstering balance sheets. In the meantime, the unfolding drama continues to captivate the financial world.

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How does this Impact Law Firms and their Clients?

πŸ’Ό What does this mean for law firm's clients?

  1. Credit Suisse AT1 Bondholders: These clients are directly affected by the decision to wipe out their bonds as part of the deal. They may have concerns about the legality of the decision and could be considering legal action to protect their investments.
  2. Shareholders of Credit Suisse and UBS: Shareholders may be impacted by the acquisition and the controversy surrounding it. As equity holders, they may face scrutiny for walking away with $3.2 billion while bondholders receive nothing. They could also be affected by any potential legal disputes or regulatory changes that arise from this case.
  3. Banks with de jure or de facto insured deposits: In light of the Credit Suisse situation, regulators may tighten regulations and supervision for banks with insured deposits. These banks may need to adjust their capital soundness and liquidity management, as well as comply with potential changes to deposit insurance premiums and stress tests.
  4. Bank Management and Executives: The controversy surrounding this deal may put pressure on bank management and executives to ensure more robust risk management and capital structure. They could face potential penalties for mismanagement or failure to maintain the stability of their banks as utilities, leading to the need for legal advice and representation.

βš– Which legal departments would this impact?

Banking and Finance Law: They could advise Credit Suisse and UBS on the legal implications of the acquisition, including any potential regulatory changes or enforcement actions resulting from the controversial deal. These legal experts might also counsel banks with insured deposits on adapting to potential changes in regulations, such as adjustments to capital soundness, liquidity management, and deposit insurance premiums.

Securities Law: A securities law department could provide guidance to Credit Suisse AT1 bondholders on their legal options and potential litigation strategies, such as challenging the decision to wipe out their bonds or seeking compensation for their losses. They may also assist shareholders of Credit Suisse and UBS in complying with disclosure requirements and understanding the legal implications of the acquisition on their investments.

Corporate Law: A corporate law department might advise Credit Suisse on the legal aspects of the merger, including deal structure, necessary approvals, and potential post-merger integration issues. They could also help UBS and Credit Suisse navigate any potential antitrust concerns, ensuring that the acquisition does not violate competition laws or raise red flags with regulatory authorities.

Employment Law: They could counsel Credit Suisse on the legal implications of continuing to provide bonuses and pay raises to employees despite the bank's financial situation and advise on any potential employee disputes that may arise as a result. They might also provide guidance to both Credit Suisse and UBS on the potential workforce integration issues following the acquisition, such as employee retention, severance packages, and compliance with labor regulations.

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by Ludo Lugnani

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