US billionaire David Tepper, who beat the Irish Government's attempt to burn junior bondholders back in 2013, has now put himself in the vanguard of efforts to fight €17bn of losses on risky Credit Suisse bonds.
he losses on holders of very risky bank bonds were imposed by Swiss authorities as part of the lightning fast rescue of Credit Suisse last weekend and are controversial because holders were wiped out even before shareholders.
The standard “waterfall” for losses in capital structure situations means shareholders are wiped out first, with bonds and other debt suffering losses after.
David Tepper told the Financial Times he will fight the action to impose losses, which Switzerland says are allowed under the debt contracts and due to emergency legislation passed to facilitate the bank rescue.
“If this is left to stand, how can you trust any debt security issued in Switzerland, or for that matter wider Europe, if governments can just change laws after the fact,” Mr Tepper, a billionaire founder of hedge fund Appaloosa Management, told the newspaper.
“Contracts are made to be honoured.”
The hedge fund manager has a track record of success in similar circumstances, including beating an effort by the then government here to force his hedge fund to take a loss on investments in risky Bank of Ireland subordinated bonds back in 2011.
The hedge fund manager has a track record of success
In a 2013 interview with Bloomberg TV, Mr Tepper told viewers how he had beaten the Irish effort to burn junior bondholders.
"You wanna hear a great credit story, I got a great credit story," he said.
While efforts to burn bondholders here during the financial crisis were limited, the Irish government did cut €14bn off the total cost of bank bailouts by making sure some losses were borne by investors that, like Mr Tepper, had loaned money to the banks in the form of relatively risky subordinated bonds.
That was done by forcing most of the bondholders to sell back their bonds for a fraction of their face value.
However a handful, including Mr Tepper's hedge fund, fought the orders.
Mr Tepper told Bloomberg he baulked at attempts to "cram down" his bonds in favour of new investors in the bank in 2011. He wasn't prepared to allow that, but would have been willing to take shares in the bank instead. He was willing to, "fight the Bank of Ireland, and fight the Irish government for that matter".
After two years he succeeded.
Meanwhile, the Swiss Financial Market Supervisory Authority (Finma) have defended the decision to wipe out about 16bn Swiss francs (€17bn) in risky Credit Suisse ‘bail-in bonds’ as part of the rescue deal for the bank even though shareholders will get a payment.
The losses were suffered by holders of a type of debt dubbed contingent convertible (co-co) bonds or alternative tier 1 (AT1) capital.
European Central Bank and Bank of England both said shareholders would be burned first
Finma said contracts for the bonds allow them to be written down if the bank faced a “viability event”.
However, the European Central Bank and Bank of England both said this week that in similar circumstances in either of their jurisdictions, shareholders would be burned first.
Bondholder groups are mobilising to fight the losses. Global law firm Quinn Emanuel says it has put together an international team of lawyers from Switzerland, the US and UK to act for bondholders representing “a significant percentage” of the total burned.