Credit Suisse (CS) has been an under-performing bank for years, if not decades. So, it should be no surprise that it faltered after US banks Silicon Valley Bank and Signature Bank collapsed last week.
CS is one of 30 global banks that is deemed systematically important. That is, would cause damage to the global financial system were it to fail. Switzerland’s regulator FINMA said that there was a risk that Credit Suisse could have become ‘illiquid, even if it remained solvent, and it was necessary for the authorities to take action’.
UBS will pay CHF3 billion for CS and also take on the first $5.4 billion in losses from unwinding derivatives and other risky assets. According to UBS,
‘Under the terms of the all-share transaction, Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to CHF 0.76/share for a total consideration of CHF 3 billion. UBS benefits from CHF 25 billion of downside protection from the transaction to support marks, purchase price adjustments and restructuring costs, and additional 50% downside protection on non-core assets. Both banks have unrestricted access to the Swiss National Bank existing facilities, through which they can obtain liquidity from the SNB in accordance with the guidelines on monetary policy instruments.’
Also read: Why Did Silicon Valley Bank Fail?
The deal involves a large amount of public support, with three tranches of liquidity and loans, as well as a pledge from the Swiss government to absorb up to CHF9 billion in potential losses.
Under the deal, holders of CS Additional Tier 1 bonds (also known as Capital Notes in Australia or Contingent Convertibles (CoCos)) will get nothing, while shareholders, who usually rank below bondholders in terms of who gets paid when a bank or company collapses, will be paid in the transaction.
Large AT1 holders are angry at the decision and may take legal action. There’s confusion over whether it’s an acquisition or rescue package. The UBS press release, calls the transaction an acquisition, but quotes the UBS Chairman Colm Kelleher stating:
‘This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue.’
Usually, when a bank fails, shareholders would be wiped out along with AT1 holders whose securities would also be converted to equity to absorb losses.
In Switzerland, the bonds’ terms state that in a restructuring, the financial watchdog is under no obligation to adhere to the traditional capital structure hierarchy, which is how CS AT1 bondholders lost out.
Is the transaction a restructuring, an acquisition or a rescue package?
The Swiss government support of the transaction clearly indicates a bail-out of a failed bank. This will be fascinating to watch and is already having repercussions on pricing and yields of AT1s.
