CoCos, CoWDs, & Zombie Bonds- On The Demise & Potential Revival of CSFB’s c.$17Bn AT1s

The sudden weekend takeover on Sunday 19th March 2023 of Credit Suisse Group by UBS caused shock and consternation in bond markets generally and particularly to the holders of c.$17Bn principal face value CSFB AT1 Additional Tier 1 Capital Bail-In Bonds, which were triggered without a capital ratio threshold being formally crossed, and written down to zero and cancelled instead of at least being converted into common stock in CSFB or its successor, despite the bondholders ranking senior to CSFB stockholders beforehand in any insolvency waterfall.Careful analysis of the legal terms of the CSFB AT1s shows that the reason for this is that they were all Contingent Write Down bonds (CoWDs) rather than standard Contingent Convertible bonds (CoCos), and all had component soft subjective evaluation triggers that could be activated by the Swiss regulator FINMA effectively at will in times of financial crisis.However, since the formal write down to zero and cancellation of the CSFB AT1 bonds, they have nevertheless reportedly still been trading well above zero and bought and sold in an active market, particularly by distressed debt and vulture funds. Leading international litigation law firms such as Quinn Emanuel have also put out immediate global calls to investors in and holders of the bonds e.g. to join a class action group, potentially inter alia against the Swiss regulator, and UBS.The reason for this is that the CSFB AT1s are now effectively Zombie bonds, potentially stirring back from the dead, from a financial perspective, because of the significant prospect of legal damages being claimable and payable to the bondholders, with unknown random payoff between zero and the full face value of the bonds plus interest, but with significant subjectively expected payoffs potentially over $1Bn, which could be determined and crystalized either in the law courts and at arbitration, or resolved consensually by agreed negotiated settlement between the parties.The paper concludes with some order of magnitude calculations for the potential fair value of the CSFB AT1 bonds now, and the likely high case value for litigation firms and commercial litigation funders