UBS buys Credit Suisse

UBS Group has agreed to acquire Credit Suisse Group with the help of liquidity assistance from the Swiss National Bank. Under the terms of the merger agreement, Credit Suisse shareholders will receive one share in UBS for 22.48 shares in Credit Suisse, valuing the deal at around $3.2 billion. The Swiss government is providing CHF 9 billion to backstop potential losses that UBS may incur. The merger comes amid industry turmoil and is seen as an emergency rescue for Credit Suisse. Both UBS and Credit Suisse will have unrestricted access to the Swiss National Bank's existing facilities to bolster liquidity.

UBS Chair Colm Kelleher acknowledged that the coming months will be difficult for Credit Suisse employees and said that UBS plans to downsize Credit Suisse's investment bank. Swiss rules would normally require a six-week interval to complete such a deal, but regulators may allow UBS to skip that period through the use of emergency measures. Credit Suisse has faced a string of problems in recent years, and pressure for a resolution has become supercharged in the wake of high-profile bank failures in the US.

AT1 bonds hit

It remains to be seen whether UBS's acquisition of Credit Suisse will ultimately prove successful or disastrous. However, investors who hold Credit Suisse's Additional Tier 1 (AT1) bonds have undeniably suffered in the wake of the tumultuous events of the past weekend. AT1 bonds were created in the aftermath of the 2008 financial crisis, as part of a regulatory push for European banks to hold more equity and to issue "contingent convertible" bonds that could be converted into equity or written off in a crisis, potentially reducing the need for government bailouts.

Credit Suisse has issued a significant amount of AT1 bonds over the past decade, and these bonds took a severe hit last week amid concerns over the bank's financial health. However, the AT1s rallied over the weekend, as investors hoped that UBS's takeover would protect them from losses. It was widely assumed that if UBS was willing to pay billions of dollars to acquire Credit Suisse, it would not leave AT1 bondholders empty-handed. Unfortunately for them, the Swiss regulators have given UBS the green light to write off a large portion of Credit Suisse's regulatory capital, including around CHF 16bn of AT1 bonds. While this move may have been legally sound, it could have negative repercussions for the broader European AT1 market, as investors become wary of investing in instruments that are subordinated to equity and vulnerable to being written off.

Source:
www.barrons.com
www.ft.com