The Bail-In of Credit Suisse CoCos: why principal write-down makes sense

Credit Suisse (CS) was sold to UBS on March 19, 2023, to avoid its further deterioration from long-lasting distress and widespread distrust, especially after the collapse of Silicon Valley Bank. The most contentious point of the deal may have been the write-down of the principal of its contingent convertible bonds (“AT1 CoCos”) while shareholders retained a minimal claim on the bank.

In this post, we react to the post by Eidenmüller and Paz Valbuena. They argue that the write-down breached the principle of pari passu, which holds that shareholders should be wiped out before bondholders suffer losses. They also argue that the actions of the Swiss authorities with regards to the sale of CS to UBS can be qualified as a bail-out. We disagree with both points. For our analysis, we draw on an earlier post, in which we argued that the actions of the Swiss authorities made sense from a corporate finance, legal, and financial stability perspective.