The $17bn battle over Credit Suisse’s debt


One scoop to start: British billionaire Sir Jim Ratcliffe was poised to make a bid that valued England’s Manchester United Football Club at more than £5bn on Wednesday night, a record acquisition price for a sports team.

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US debt investors vs Switzerland

David Tepper is one of the best distressed debt investors of his generation.

During the last financial crisis, he famously made billions of dollars betting that US banks would not be nationalised. But his wager on the most recent banking crisis hasn’t worked out as well.

Tepper is among a group of investors who bought up tranches of Credit Suisse’s junior and senior debt as the Swiss lender spiralled into chaos.

But the fate of one class of debt he bought, known as additional tier one bonds or AT1s, was sealed after the Swiss government used an emergency ordinance to write down the bonds to zero, while the bank’s shareholders got $3.2bn. Typically equity is wiped out before AT1s.

Now Tepper and a group of US distressed debt investors are preparing to sue the Swiss lender, with help from lawyers at firms including Quinn Emanuel and Pallas, for its eleventh-hour decision to wipe out $17bn of AT1s as part of UBS’s emergency takeover.

“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,” the billionaire founder of Appaloosa Management told the FT. “Contracts are made to be honoured.”

AT1s, as DD explained earlier this week, were introduced after 2008 to help banks bolster their balance sheets by shifting some of the risk away from depositors and on to bondholders.

They are designed to essentially self-destruct when a bank’s capital ratio falls below a certain level, automatically strengthening it in times of distress and benefiting creditors with higher-ranking claims, such as owners of senior debt.

However, as the Swiss takeover saga has exemplified, these bonds can also apparently be wiped out with a flick of the pen by regulators. (Axiom Alternative InvestmentsJérôme Legras’s Alphaville provides a helpful explainer.)

The fiasco has also led some of Asia’s biggest banks to second-guess their own issuance of risky bank debt, the FT reports. Major lenders in Japan, Singapore and Hong Kong are placing new AT1 bond deals on hold until market conditions stabilise, according to people familiar with the plans.

The fallout from the CS deal “changes the whole nature of the [AT1] market,” said Greg Peters, co-chief investment officer of PGIM Fixed Income. “Basically, it’s a zombie market going forward in my mind.”

Not everyone is sympathetic to the bondholders burnt by Swiss regulators.

“Those who profit from opportunities should also take their share when risks materialise,” Germany’s central bank boss Joachim Nagel told the FT in an interview on Wednesday.

Even as CS bondholders mourn their losses, it isn’t exactly the best time to be a shareholder, either. UBS paid just $3.25bn for CS, a sliver of its original value.

The past few weeks have been a searing reminder that it’s tough to be a bank shareholder in general, writes Unhedged’s Ethan Wu. Unless, of course, it’s UBS.

Hong Kong vs Singapore: the race for offshore funds

Private equity firms, hedge funds and the world’s super-rich have long parked their funds in offshore jurisdictions such as the British Virgin Islands, Mauritius and the Cayman Islands.

Hong Kong and Singapore are trying to change that, DD’s Kaye Wiggins and the FT’s Mercedes Ruehl, Leo Lewis and Chan Ho-him report.

For the past few years, Asia’s rival financial hubs have quietly created new financial structures that they hope will transform the flows of capital around the world.

The idea is simple: they want to keep the low tax and privacy of offshore funds, but have both the funds and their managers in the same country.

Hong Kong moved first. After the Panama Papers and Paradise Papers leaks in 2016 and 2017 sparked global news coverage of the use and abuse of Caribbean offshore funds, the territory spotted its chance to create an alternative. In 2018 it launched the “open-ended fund company”, known as an OFC.

But adoption was low: just eight were registered in the first two years. One thing limiting the scheme’s take-up is that many Chinese investors prefer to put their money in Singapore, Hong Kong-based advisers say privately, which they regard as being further from Beijing’s reach.

In 2020 Singapore set up its own version, the “variable capital company” or VCC. It took off: 872 VCCs were registered in the city-state as of February.

The stakes are high. The rival financial hubs are trying to lure away the best bits of the Caribbean islands’ lucrative business without also risking the public backlash they have faced for facilitating tax avoidance.

They also need to avoid attracting capital from sanctioned groups, money launderers and others who might be drawn to the lack of public disclosure.

The names of shareholders aren’t public, which one lawyer who has established the vehicles said was “very important because if I was a shareholder and had money in multiple VCCs, I wouldn’t want people to know where I’d invested”.

It’s not always clear who’s using these, and why — even, in some cases, to the people who set them up.

“It’s not that we have a fixed idea yet of what might be coming under this umbrella,” said one fund manager who set up an OFC in January.

“We just want to be ready to say ‘yes’ if, say, a Chinese tycoon calls us and says they want to put some capital into this kind of structure.”

Drama takes up residence at duelling hotel empires

In just a decade, entrepreneur Sharan Pasricha has taken hotel group Ennismore from a single London outpost to a global luxury hotel colossus. (With a little help from his Indian telecoms billionaire father-in-law Sunil Bharti Mittal, and his co-owner, French hotel giant Accor.)

But it appears even Pasricha’s charm has its limits. Earlier this week, rival hotelier Andrew Zobler, the man behind the five-star NoMad hotel, accused the Ennismore founder of trying to “sabotage” efforts to find a buyer for half of his hotel group Sydell. Zobler is seeking damages of about $30mn as part of a case filed in New York.

In 2017, Zobler went looking for outside investment to replace his longtime business partner, US billionaire Ron Burkle, after a dramatic falling out between the pair.

When he decided to partner with MGM Resorts International instead of Pasricha on a deal to buy Burkle out, Zobler alleges, this led to Pasricha’s “overly emotional and malicious reaction”.

Pasricha then broke a confidentiality agreement and approached Burkle’s investment fund Yucaipa directly in “a calculated attempt to foist himself into the Sydell businesses”, according to the lawsuit.

Pasricha revealed to Burkle that Sydell was partnering with MGM on the buyout deal, giving Yucaipa the licence to exert pressure on MGM to pay a higher price for the stake. This cost Zobler and Sydell a $15mn payout from MGM which was conditional on them securing a lower price for the deal.

Pasricha and Ennismore are yet to file a response to the lawsuit. “Zobler’s claims are completely baseless and nothing more than a desperate attempt by a repeat litigator to misuse the judicial system to gain financially,” said an Ennismore spokesperson. “We deny the matters raised and will defend vigorously against these meritless claims.”

Job moves

  • UK law firm Slaughter and May has promoted 10 new partners.

  • Digital World Acquisition Corporation, the blank-cheque company that plans to take Donald Trump’s media business public, has ousted its chief executive Patrick Orlando.

  • Citigroup has named Robin Rousseau and Barry Weir as co-heads of M&A for Europe, the Middle East and Africa, replacing Alison Harding-Jones. They’ll continue to be based in Paris and London respectively.

  • Linklaters has hired Latham & WatkinsJohn Guccione as a corporate partner in London.

Smart reads

Overdue diligence The accounting scandals at Adler and Wirecard have left scars on Big Four firms, making them much more selective and shifting the balance of power between auditors and their clients, the FT’s Olaf Storbeck writes.

Follow the money An FT data analysis reveals that nearly half of all foreign direct investment into Gautam Adani’s empire in recent years came from offshore entities linked to his family.

And one smart listen: the FT’s Martin Wolf explains why banks fail on Behind the Money.

News round-up

First Republic bosses to skip bonuses as Fitch slashes its credit rating (FT)

Bank of England says it warned US regulators over SVB risks before its collapse (FT)

PacWest secures $1.4bn of cash from Atlas after deposits fall 20% (FT)

Investment banks Cenkos and FinnCap to merge in all-share deal (Sky News)

UK regulator warns on Broadcom’s $69bn VMware deal (FT)

TikTok caught in US-China battle over its powerful algorithm (FT)

Unhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here

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