Hedge funds are snapping up claims on Credit Suisse Group AG’s AT1s, setting up what will be a contentious legal battle over the $17 billion in debt that was written down to zero.
(Bloomberg) — Hedge funds are snapping up claims on Credit Suisse Group AG’s AT1s, setting up what will be a contentious legal battle over the $17 billion in debt that was written down to zero.
Marathon Asset Management LP, Redwood Capital Management LLC and Sona Asset Management are among funds buying Credit Suisse’s AT1 bonds, which are now trading as claims, according to people familiar with the matter. They’re likely betting that the bonds will win a lucrative repayment, potentially through litigation.
Representatives for Marathon didn’t respond to a request for comment, while representatives for Redwood and Sona declined to comment.
The wipeout of the Additional Tier 1 bonds, a category of risky debt that’s designed to be a capital buffer when banks are in crisis, was the most controversial part of the Swiss lender’s takeover by UBS Group AG. The move sparked a furious response from AT1 holders because they typically only face losses after equity investors are fully written down. In this case, the deal preserved $3.3 billion of value for shareholders.
Hundreds of millions of dollars of the AT1 bonds changed hands daily between dealers this week, rising to around 5 to 7 cents from as low as 1 cent, some of the people said, asking not to be identified because the transactions are private.
Many brokers are already providing claims documents to traders, said Louisa Watt, a partner and co-chair of the special situations and trading team at Brown Rudnick LLP. She said her firm was negotiating on behalf of some funds.
Any plans to litigate could take years to unfold. The subordinated debt of Lehman Brothers was the subject of a court debate until last year, while investors are still taking a punt on the bonds of defunct Portuguese lender Banco Espirito Santo SA nearly nine years after its failure.
Could Credit Suisse’s AT1 Wipeout End Up in Court?: QuickTake
In an interview with Bloomberg TV on Wednesday, Marathon’s Chief Executive Officer Bruce Richards said the firm is looking at Credit Suisse AT1s after previously avoiding them. “They have fallen this much and it’s all about the documentation as well as the potential claim,” he said.
Hedge funds like Marathon and Redwood specialize in buying distressed debt. Both were among the funds that bought debt of troubled developer China Evergrande Group. John Aylward’s credit hedge fund Sona surged 25% in 2022 on bets relating to distressed credits.
Pacific Investment Management Co. and Invesco Ltd. were among the largest holders of Credit Suisse’s AT1s prior to the UBS takeover.
–With assistance from Giulia Morpurgo, Rachel Butt, Lucca de Paoli and Lynn Thomasson.
(In story first published March 23, corrects mispelling of name in paragraph 6)
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