International Tax Panorama

The recent merger of Credit Suisse with UBS, has eerie similarity to the Yes Bank of India. 

The UBS takeover of crisis-hit Credit Suisse has rendered $17 billion-worth bonds issued by Credit Suisse worthless. As part of the deal brokered by the Swiss government, it was decided that the high-risk Additional Tier 1 (AT-1) bonds issued by Credit Suisse will be written down even as equity shareholders of the bank are reportedly set to receive one UBS share for every 22.48 Credit Suisse shares they hold.  

The Yes Bank Episode

In the case of Yes Bank, the Bank decided to write-off AT1 bonds worth around Rs 8,400 crore as part of its restructuring plan.

In 2020, when a financially beleaguered Yes Bank was restructured. The lender’s asset quality woes had reached a point where its capital was eroded, and without a bailout, additional tier-1 bondholders would have either been converted to equity or been written-down. 

Thus the Reserve Bank of India (RBI)-appointed administrator wrote off several AT1 bonds, disentitling the bond holders from being repaid their investment. In 2021, several bond holders challenged the write off before the Bombay High Court on the grounds of it being arbitrary and unreasonable.

In Jan 2023, The Bombay High Court set aside the Reserve Bank of India (RBI)-appointed administrator’s decision to write off the additional tier (AT1) bonds issued by Yes Bank in 2016 and 2017. 

In evaluating the merits of the challenge, the Court restricted itself to one question, namely, “[w]hether the Administrator would be competent to write off the AT-1 bonds on March 14, 2020 i.e. the day after the final Yes Bank Reconstruction Scheme 2020 was notified on March 13, 2020.”

The Court set aside the write off decision on the ground that Yes Bank’s administrator had exceeded his powers by making a ‘policy decision’ not envisaged under the restructuring scheme, and implementing it a day after the scheme was operationalised. The Court explicitly refrained from questioning the fairness of the write off and restricted itself to the procedural lapses involved in the implementation of the write-off. 

Now the bank has challenged against the High Court decision in the Supreme Court of India.  

Why both banks wiped out AT1 Bonds:

Now coming back to the Credit Suisse deal, the local regulator Financial Market Supervisory Authority, or FINMA, specifically takes a view that it is necessary to write-down the additional tier-1 bonds of Credit Suisse due to the extraordinary nature of the bailout brokered by the Swiss government.  

The Credit Suisse deal actually exemplifies what Yes Bank’s defence was in the case before the high court that considering the extraordinary restructuring that they underwent to save the institution, a write-down of additional tier-1 bonds was necessary.

Essentially, what has been done today when the Swiss government brokered UBS’ takeover of Credit Suisse is also in the larger interest of protecting depositors and preventing a contagion effect in domestic and global markets.

The nature of AT1 Bonds:

AT1 bonds are considered to be high-risk debt instruments as it comes with a condition that banks can stop paying interest on it, or even write them off, in the face of a financial emergency. Under stable conditions, they offer higher returns than other debt papers, making them an appealing option for investors. Now, as the Yes Bank and Credit Suisse incidents have shown, it does not take much for the AT1 bonds to become worthless in a time of crisis.  

Future course of action by AT1 Bond holders:

As expected the writing down of AT1 bonds has not gone down well with the bondholders as it is the equity holders who are conventionally expected to foot the losses before bondholders, as per seniority of the capital structure.

Lawyers from Switzerland, the United States and UK are talking to a number of Credit Suisse Additional Tier 1 (AT1) bond holders about possible legal action after the state-backed rescue of Credit Suisse by UBS wiped out AT1 bonds, law firm Quinn Emanuel Urquhart & Sullivan said on Monday.

In case of Yes bank, it will be interesting to see whether the writing down of AT1 bonds by Credit Suisse will be featured in Yes Bank’s defence when it appears before the Supreme Court next.