# Credit Suisse bond wipe-out will not trigger credit insurance payout
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2023-05-18
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Credit Suisse bond wipe-out won't trigger credit
Meta Description: Find out why holders of credit insurance linked to Credit Suisse bonds will not receive a payout after a state-engineered merger with UBS.
URL: https://financedigest.com/credit-suisse-bond-wipe-out-will-not-trigger-credit-insurance-payouthtml

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By Chiara Elisei

LONDON (Reuters) -Holders of credit insurance linked to Credit Suisse bonds will not get a payout after a committee that adjudicates on disputes in the derivatives market said on Wednesday the bank’s state-engineered merger with UBS was not a credit event.

The Swiss bank in March was taken over by UBS in a state-assisted rescue deal that wiped out Credit Suisse’s $17 billion Additional Tier 1 (AT1) bondholders.

A [Governmental](https://www.financedigest.com/employers-and-the-government-should-support-employees-dependency-on-high-cost-credit-says-neyber.html "Employers and the Government should support employees’ dependency on high-cost credit, says Neyber") Intervention Credit Event had not occurred,” the EMEA Credit Derivatives Determination [Committee](https://www.financedigest.com/swiss-authorities-draw-flak-in-credit-suisse-probe-report-says.html) (CDDC) said in a statement on its website, responding to a question from an investor last week.

The CDDC said it had come to the conclusion following an examination of the ranking clauses for the AT1 bonds [listed in the request made by the investor](https://www.financedigest.com/analysis-european-retailers-are-on-investors-naughty-lists-this-christmas.html "Analysis-European retailers are on investors’ naughty lists this Christmas").

The [investor said the AT1 bonds](https://www.financedigest.com/investors-flee-uk-bonds-pushing-gilts-to-huge-monthly-loss.html "Investors flee UK bonds, pushing gilts to huge monthly loss") were pari passu, in other words ranking at the same level, with the reference bond underlying the CDS contracts, which included a subordinated bond that matured in 2020.

But the [committee’s](https://www.financedigest.com/swiss-authorities-draw-flak-in-credit-suisse-probe-report-says.html) [view was that holders of the 2020 bonds were priority creditors compared](https://www.financedigest.com/gamers-spend-twice-as-long-viewing-intrinsic-in-game-ads-compared-to-other-digital-channels-reveals-new-research-from-lumen-and-anzu.html "Gamers Spend Twice As Long Viewing Intrinsic In-Game Ads Compared To Other Digital Channels, Reveals New Research From Lumen and Anzu") with AT1 bondholders.

“Common sense prevailed,” said Jerome Legras, managing partner and head of research at Axiom [Alternative Investments](https://www.financedigest.com/investing-blockchain-technologies-made-simple-new-quantatex-alternative-investment-account.html "Investing in Blockchain Technologies made simple with new Quantatex Alternative Investment Account"). “Effectively, saying that subordinated Tier 2 and AT1 are pari passu would have been very problematic for the AT1 market.”

The amount of gross notional outstanding [CDS linked to Credit Suisse](https://www.financedigest.com/credit-suisse-executives-reassure-investors-after-cds-spike-financial-times-reports.html "Credit Suisse executives reassure investors after CDS spike, Financial Times reports") bonds stood at more than $19 billion in March, according to data from the Depository Trust & Clearing Corporation. The DTCC provided no details of what seniority of [bonds the CDS](https://www.financedigest.com/pimco-cut-big-position-in-russia-cds-by-adding-bonds-in-q2.html "PIMCO cut big position in Russia CDS by adding bonds in Q2") contracts were written against.

A panel of eleven finance companies, including Barclays, Citibank, [Deutsche Bank](https://www.financedigest.com/citigroup-to-buy-deutsche-bank-license-in-mexico-for-wholesale-unit.html "Citigroup to buy Deutsche Bank license in Mexico for wholesale unit") and Goldman Sachs as well as Elliot Investment Management and PIMCO came to a unanimous decision, the CDDC statement said.

[Credit Suisse](https://www.financedigest.com/credit-suisse-shares-hit-record-low-after-report-bank-is-looking-to-raise-cash.html "Credit Suisse shares hit record low after report bank is looking to raise cash"), which is still listed as a member of the EMEA CDDC on the group’s website, was not listed as having taken part in the decision.

[TEST CASE](https://www.financedigest.com/australia-seeks-to-ease-covid-19-test-rules-as-cases-hit-records.html "Australia seeks to ease COVID-19 test rules as cases hit records")

The debate on the CDDC [committee](https://www.financedigest.com/swiss-authorities-draw-flak-in-credit-suisse-probe-report-says.html) was another [test case](https://www.financedigest.com/covid-testing-rules-spark-christmas-travel-chaos-in-australia-as-cases-hit-records.html "COVID-testing rules spark Christmas travel chaos in Australia as cases hit records") for AT1s, which took a beating in March following the surprise decision by Swiss regulators.

AT1 bonds, introduced after the 2008 financial crisis, act as shock absorbers if a [bank’s capital](https://www.financedigest.com/be-simple-in-bank-capital-bank-of-england-tells-global-regulators.html "Be simple in bank capital, Bank of England tells global regulators") levels fall below a certain threshold as they can be converted into equity.

[European regulators have said they would continue to impose losses on shareholders first if a bank](https://www.financedigest.com/u-s-european-banks-could-lose-over-5-billion-from-risky-buyout-loans.html "U.S., European banks could lose over billion from risky buyout loans") fails, helping to calm panicky investors. [Hong Kong](https://www.financedigest.com/evergrande-winding-up-lawsuit-in-hong-kong-adjourned-to-nov-7.html "Evergrande winding-up lawsuit in Hong Kong adjourned to Nov 7") and Singapore also said they would stick to the traditional hierarchy of insolvency claims in which equity investors usually rank below bondholders.

Some [investors still hope to recover some of their money](https://www.financedigest.com/virgin-money-shares-leap-on-higher-profit-investor-payouts.html "Virgin Money shares leap on higher profit, investor payouts") if litigation attempts prove successful.

Hundreds of lawsuits have been filed over the terms of the emergency deal to save [Credit Suisse](https://www.financedigest.com/explainer-credit-suisse-how-did-it-get-to-crisis-point.html "Explainer-Credit Suisse: How did it get to crisis point?").

The 3 billion Swiss franc ($3.35 billion) rescue, hammered out over a March weekend amid turmoil in the global [banking sector](https://www.financedigest.com/building-resilience-in-the-uk-banking-sector.html "Building resilience in the UK banking sector"), upended a long-established practice of giving bondholders priority over shareholders in a debt recovery.

Law firms including Quinn Emanuel Urquhart & Sullivan and Pallas [Partners have filed claims on behalf of investors](https://www.financedigest.com/surrenden-invest-partners-with-david-phillips-to-offer-residents-and-property-investors-a-superior-living-experience.html "Surrenden Invest partners with David Phillips to offer residents and property investors a superior living experience ").

(Reporting by Chiara Elisei, editing by Karin Strohecker and Jane Merriman)


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