This week, everyone in Switzerland has been talking about just one thing: the UBS-Credit Suisse deal.
The deal was announced on Sunday evening, after a weekend of negotiations between the two banks, the Swiss National Bank, and the Swiss Financial Market Supervisory Authority.
The final deal sees Credit Suisse being acquired by UBS for CHF 3bn in an all-stock deal. According to UBS, the combined bank will have $5 trillion of invested assets. The Swiss National Bank is providing up to CHF 100bn in liquidity to support the takeover, and the Swiss government gave a guarantee to UBS to cover losses of up to CHF 9bn over the short term.
Credit Suisse shareholders will receive one UBS share for every 22.48 Credit Suisse shares they hold. On the other hand, the bondholders of certain Credit Suisse AT1 (Additional Tier 1 capital) bonds will receive nothing. As part of the deal negotiations, FINMA instructed Credit Suisse to write down completely the perpetual AT1 bonds issued by Credit Suisse between 2013 and 2022, 13 in total, for a nominal value of CHF 16bn.
In the days since the announcement, there have been many discussions on the treatment of the bondholders of these bonds versus that of the equity holders of Credit Suisse: in normal conditions, equity holders’ claims are subordinated to those of bond holders’ claims, so the decision to write down the value of these bonds while equity holders still receive some value for their share appears to be an inversion in the capital structure seniority.
Rumors about lawsuits started to emerge and Goldman Sachs and JPMorgan Chase have started to look into brokering the bonds to distressed and litigation finance funds.
AT1 bonds or Contingent Convertible bonds (CoCos) were introduced in the aftermath of the Global Financial Crisis with the goal of strengthening European banks’ balance sheets. These bonds can be converted into equity if a bank’s capital falls below a specified level. According to the issuance prospectus, the Credit Suisse bonds could also be irrevocably written down and “the Write-down may occur even if existing preference shares, participation certificates, if any, and ordinary shares of CSG remain outstanding”.
Credit Suisse and UBS are the only two AT1 issuers to have this provision, other banks in Europe do not have a provision in their issues that allow for a full write down of these bonds. The European Central Bank and the Bank of England have also released statements distancing themselves from the FINMA decision and reassuring investors that in a similar case in another jurisdiction, equity holders would be the first one to absorb the losses. These statements, however, were not enough to calm down CoCos investors, and the price of these securities tumbled this week.
These bonds attracted many investors with high yields in an environment of zero interest rates, but the events of last week will likely have an impact on the funding costs for banks, as investors realize what the worst-case scenario can be.
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