At least 80 Credit Suisse investors in Singapore are in talks to sue the Swiss government over its decision to write down $17bn of Credit Suisse bonds on the grounds it violates a free trade agreement.
The bondholders are preparing to argue that the move breached protections against unfair state actions under the Singapore-European Free Trade Association signed with Switzerland in 2003, according to law firm Wilmer Hale, which is in talks with investors.
The potential lawsuit in Singapore would open a new front in the legal battles against Switzerland for its decision to wipe out the bonds as part of the bank’s state-sponsored takeover by UBS.
Law firms WilmerHale and Engelin Teh Practice are in talks with a group of family offices and wealthy retail investors in the Asian city state whose additional tier 1 or AT1 bonds were written off as part of the deal.
Risky AT1 debt is popular in the region among retail investors. AT1s are a class of debt designed to take losses when institutions run into trouble but are generally believed to rank ahead of equity on the balance sheet.
The investors so far had collectively invested close to $70mn in AT1s, enough to attract the interest of four global litigation funds, said two people familiar with the discussions, adding that the number of investors was likely to grow.
The Singapore discussions could also lead to similar actions by investors in other parts of Asia, where a large number of wealth managers, private banks and rich individuals had bought the Credit Suisse debt instruments.
At least $750mn of the bonds were denominated in Singapore dollars, 91 per cent of which came from Singapore and another 7 per cent from elsewhere in Asia.
Switzerland angered bond investors when the government used an emergency ordinance to write down the bonds to zero, even as it orchestrated a deal where UBS will pay $3.25bn to shareholders. Quinn Emanuel Urquhart & Sullivan and Pallas Partners are among the law firms representing US bondholders who intend to fight the decision.
Unlike the US, Asian countries including Singapore, China, India, South Korea and Japan have unique protections under multilateral treaties designed to protect foreign investment, according to WilmerHale.
“There are arguments that the Swiss government breached these protections by acting contrary to the investors’ legitimate expectations regarding the hierarchy of claims — that bond holders will rank higher than shareholders,” said Jonathan Lim, a partner at WilmerHale focusing on international arbitration.
In contrast with the US, where big funds such as Pimco and Legg Mason were long-term holders of AT1s, Asian investors are typically smaller individuals and enterprises. The Singapore investors’ holdings ranged from $200,000 to $12mn for some of the family offices.
Other lawyers cautioned that a Singapore lawsuit was an “uphill battle” and played down the chances of the investors getting their money back.
“I haven’t closely assessed the merits of this approach but I would say it will be a difficult argument to win,” said one international arbitration expert.
One investor, who runs a family healthcare business in Singapore, invested $500,000 of his savings in Credit Suisse AT1 bonds at the beginning of the year.
He wants the lawsuit to go ahead. “I’m not optimistic but it is better than doing nothing. I want a front-row seat to this debacle and hopefully I can learn something,” he said.
A retired entrepreneur in Singapore said they wanted to participate in the potential legal action because they felt “completely misled” over the bonds after investing $700,000 in the AT1s.
“I invested because this was a household brand name. Now I have nothing.”