UBS bails out Credit Suisse in $3.24 billion take-over
21 Mar 2023
Switzerland's largest bank, UBS agreed on Sunday (19 March) to acquire beleaguered rival Credit Suisse for $3.24 billion, with support from Swiss authorities, in a bid to bail out the financial sector giant from certain collapse.
The Swiss government has offered to guarantee any losses up to $9.6bn, while the Swiss National Bank will offer up to $110 billion of liquidity, to facilitate the deal. According to SNB president Thomas Jordan, it was important to act quickly to shore up confidence in the sector before financial markets opened on Monday.
Under the terms of the rescue package, Credit Suisse will write off its Additional Tier One (AT1) bonds. The Swiss regulator FINMA on Sunday said the AT1 bonds, which are widely regarded as relatively risky investments, will be written to zero as part of the deal.
The rescue package will thus wipe out one section of Credit Suisse’s bondholders, causing them losses to the tune of 16 billion Swiss francs ($17 billion), creating panic in the bond market.
According to Goldman Sachs, the write-off is the largest loss ever inflicted to AT1 investors since the birth of the asset class post-global financial crisis.
However, FINMA’s move should not come as a surprise as the AT1s are there to absorb losses, Elisabeth Rudman, global head of financial institutions told CNBC’s “Squawk Box Europe” on Monday. “They’ve done what they were supposed to do.”
AT1 bonds, also known as contingent convertibles or “CoCos,” are a type of debt that is considered part of a bank’s regulatory capital. AT1s were created in the aftermath of the financial crisis as a way of shifting risks away from taxpayers in crisis situations. Due to their elevated risk factor, they often have higher yields than other bonds.
Holders can convert them into equity or write them down in certain situations like a fall in capital ratio below a previously agreed threshold.
All shareholders of Credit Suisse will receive 1 share in UBS for 22.48 shares in Credit Suisse. The exchange ratio reflects a merger consideration of 3 billion Swiss franc (~$3.24 billion) for all shares in Credit Suisse.
Credit Suisse’s collapse came after its biggest investor, Saudi National Bank, said it could not offer any more support to the Swiss bank financially due to regulatory restrictions. Things came to a head after years of losses and difficulties.
The crisis that came just days after the collapse of Silicon Valley Bank and Signature Bank in the US sent shock waves through the banking sector.
The development also sparked concerns about how this could impact global credit markets and AT1 bonds from other major financial institutions.
Banking regulators in the European Union, which Switzerland is not a part of, and the Bank of England on Monday welcomed the steps taken by Swiss authorities to resolve the situation, but indicated that they would have followed a different approach in similar situations.
While they said they, they also noted that there is a specific order in which “shareholders and creditors of a troubled bank should bear losses.”
According to them, common equity instruments are the first ones to absorb losses, and only after their full use would Additional Tier 1 bonds be required to be written down.
The Bank of England said the UK “has a clear statutory order” detailing which shareholders and creditors were expected to take on losses, adding, that AT1 bonds “rank ahead” of equity investments and that it had followed this process in the unwinding of SVB UK.