Navigating the Credit Suisse AT1 Bond Write-Off: Can Middle East Investors Seek Redress from Switzerland?

In one of the most noteworthy bond write-offs in recent memory, Switzerland, through its financial regulator FINMA, wrote off in March 2023 approximately USD17 billion worth of Additional Tier 1 (AT1) corporate bonds in the context of the acquisition of the ailing Credit Suisse by UBS. Bondholders from Middle East states are expected to be exposed to billions of dollars in losses as a result of this write-off.

At least three notices of dispute have been issued against Switzerland by aggrieved investors, which trigger the commencement of investor-state arbitration proceedings under different bilateral investment treaties (BITs) signed by Switzerland and the investors’ home state.

This article explores how affected investors can seek compensation through investor-state arbitration.

 

The Legal Framework: BITs and Investor Protection

The backbone of investor-state claims is usually a BIT – an agreement between two countries that protects investments made by each other’s nationals. Switzerland is party to approximately 120 such BITs. Most Middle East states have signed BITs with Switzerland, including Saudi Arabia (2008), Oman (2005), Qatar (2004), Kuwait (2000) and the United Arab Emirates (1999). These treaties typically guarantee protections such as fair and equitable treatment, national treatment, most-favoured-nation treatment and protection against unlawful expropriation.

 

Meeting the Jurisdictional Hurdles

Before a tribunal can consider the merits of an investor’s claim against Switzerland, it must first assert its jurisdiction. Jurisdiction is confirmed upon the satisfaction of the following criteria:

1. Jurisdiction Ratione Personae (Who Can Sue?)

Jurisdiction ratione personae requires that the claimant qualify as a protected investor under both the applicable BIT and potentially under Article 25 of the ICSID Convention. This typically includes nationals of a party to the BIT (other than Switzerland), entities established under the law of a party to the BIT (other than Switzerland) or effectively controlled by nationals of that state. Numerous tribunals have even accepted indirect control (e.g., through holding companies in third states) as sufficient to establish investor status.

2. Ratione Materiae (What Is the Investment?)

To establish jurisdiction ratione materiae, the claimant must demonstrate that the dispute arises from a protected investment under both the relevant BIT and potentially under Article 25 of the ICSID Convention. While the ICSID Convention does not define the term “investment”, tribunals have developed certain criteria—often referred to as the Salini criteria—which include contribution of capital, duration, assumption of risk, and contribution to the host state’s development. However, these factors are not necessarily strict jurisdictional requirements and can be applied flexibly.

Tribunals have found that bonds and financial instruments can qualify as investments.In Fedax v. Venezuela, promissory notes were accepted as protected investments, while in Abaclat v. Argentina, sovereign bonds held by private investors were deemed within ICSID’s jurisdiction. Similarly, in Adamakopoulos and others v. Cyprus, corporate bonds issued by a private bank qualified as an investment.

3. Ratione Temporis (When Did It Happen?)

Jurisdiction ratione temporis concerns the timing of a tribunal’s authority and requires that the investment, the breach, and the initiation of the claim must all occur after the relevant treaty entered into force. A state can be held responsible for a breach of an international obligation if it was bound by that obligation at the time the disputed act occurred, as confirmed by Article 13 of the International Law Commission’s (ILC) Articles on State Responsibility.

4. Ratione Voluntatis (Was There Consent?)

Jurisdiction ratione voluntatis refers to the requirement that both the investor and the host state must give clear and mutual consent to arbitration for a tribunal to have authority over the dispute. Under Article 25(1) of the ICSID Convention, this consent must be in written form, but it can be provided in various ways—including through treaties, domestic legislation, or contracts—so long as it is sufficiently documented.

 

Attributing FINMA’s Actions to Switzerland

In order for Switzerland to be liable under a BIT, FINMA’s actions have to be attributable to the state. Under the ILC Articles on State Responsibility, there are several routes to attribution. Article 4 covers actions by state organs, broadly defined to include government bodies and officials acting in any capacity. Article 5 extends attribution to entities that, while not formal state organs, are authorized to exercise governmental authority. Lastly, Article 8 attributes conduct to the state if individuals or groups acted under the direction or control of the state.

 

The Merits of the Case

Once jurisdiction has been established, the merits of the case will be considered from the following point of view:

1. Expropriation

BITs generally stipulate that expropriation, defined as the direct or indirect taking of private property, is only permissible if it meets specific criteria. These criteria generally include serving a public purpose, being non-discriminatory, adhering to due process, and providing adequate and effective compensation.

In the case of the AT1 bond write-off, FINMA’s actions arguably nullified the bondholders’ rights, raising an argument that the measure amounted to indirect expropriation.

A common defence to expropriation is that a measure was taken in the context of a state’s common regulatory measures or in response to an emergency. The response to such arguments requires a detailed analysis of the factual background.

2. Fair and Equitable Treatment

The fair and equitable treatment standard under international investment law protects investors from arbitrary, non-transparent, or discriminatory conduct by a host state. Many tribunals have interpreted this standard broadly to include the protection of an investor’s legitimate expectations, transparency, due process, proportionality, and legal security.

3. National Treatment

National treatment clauses require Switzerland to treat foreign investors no worse than its own nationals in like circumstances. If it can be shown that domestic investors were shielded, compensated more favourably or treated differently from foreign AT1 bondholders, this could form the basis of a claim against Switzerland.

4. Most-Favoured-Nation Treatment

Most-favored-nation treatment clauses are present in BITs. They ensure foreign investors get treatment at least as good as that offered to investors from any third country. If Switzerland offered better terms or remedies to bondholders from other countries – or included more favourable terms in other BITs – that could bolster other investor claims under these provisions.

 

Enforcement

Article 54 of the ICSID Convention streamlines the recognition and enforcement of arbitral awards by requiring member states to treat them as final domestic judgments. That essentially dispenses of the often-cumbersome recognition and enforcement process of the New York Convention.

However, execution – the actual seizure of assets – is governed by local laws and remains distinct. While states waive jurisdictional immunity by consenting to arbitration, this does not automatically waive immunity from execution. Commercial assets may be seized, but public assets typically remain protected. In high-profile cases, states often comply voluntarily to safeguard their reputation.

 

Can Investors Pursue Claims Against Switzerland Over the AT1 Bond Write-Off?

Our team at DLA Piper is available to advise investors on their potential claims and necessary next steps to advance them. The write-off of the AT1 Bonds and the resulting claims of AT1 bondholders are very much worth exploring.