UBS Acquisition of Credit Suisse: Bye Bye AT1 Investors, Anxiety Builds Among Banks' Subordinated Bondholders

UBS Group AG's UBS takeover of Credit Suisse Group AG CBS has done nothing to alleviate market concerns about the banking sector, and it continues to throw a shadow over the rights of credit institution shareholders and bondholders.

On Sunday, the Swiss government used its emergency powers to speed up the completion of the Credit Suisse-UBS merger without requiring consent from shareholders.

In accordance with the terms of the all-share transaction, holders of Credit Suisse shares will get one UBS share for every 22.48 shares they own, or CHF 0.76 per share, for a total consideration of CHF 3 billion.

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“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue”, UBS Chairman Colm Kelleher commented in the press release. 

With the merger of UBS and Credit Suisse, the combined company will have about $5 trillion in assets under management, of which $3.4 trillion will be in the wealth management business and $1.5 trillion in asset management services. This makes UBS the second-largest Wealth Manager in the world and the third-largest Asset Manager in Europe.

“Bringing UBS and Credit Suisse together will build on UBS’s strengths and further enhance our ability to serve our clients globally and deepen our best-in-class capabilities”, UBS Chief Executive Officer Ralph Hamers said.

The Swiss National Bank said that both CS and UBS have unrestricted access to current SNB liquidity facilities.

CS’s AT1 Bondholders Wiped Out; Risk Spreads To Other Banks

The CS-UBS deal will result in the entire write-down of CHF 15.8 billion in Credit Suisse Additional Tier 1 (AT1) bonds, the largest loss ever recorded in the European subordinated bond market.

AT1 bonds are a form of hybrid bond that incorporates debt and equity characteristics, and are issued in order to meet regulatory requirements for additional Tier 1 capital. AT1 bonds include a "loss absorption" mechanism, which means the bonds may be converted into stock if the issuer's capital falls below a particular threshold.

In addition to the AT1 write-down, UBS also obtained CHF 9 billion in insurance from the Swiss authorities in the event of losses surpassing CHF 5 billion (incurred by UBS), providing UBS about CHF 25 billion in protection for support marks, purchase price adjustments, and restructuring charges.

However, the fact that CS stockholders got some compensations, albeit at a fraction of the company's market value at last Friday's closing, while subordinated bondholders were wiped out, enraged the latter.

AT1s should be in fact regarded senior to equity capital, and this approach is causing widespread concern regarding AT1s of other European banks.

Patrik Kauffmann, a portfolio manager at Aquila Asset Management AG, said yesterday on Bloomberg, "This absolutely makes no sense and  will be a severe blow to the AT1 market.

Pacific Investment Management Co (PIMCO)., Invesco Ltd. IVZ, and BlueBay Funds Management Co. SA were among the major asset managers holding Credit Suisse AT1 notes, per Bloomberg Data.

Steno Research CEO Andreas Steno Larsen wrote on Linkedin: “Bye bye AT1 investors! This is likely going to create material spill-overs to European banking markets as AT1s have been a popular instrument among larger European banks.”

The macro analyst also stated that Barclays BCS, Banco Santander SA SAN, and Deutsche Bank AG DB now rank among the banks with the highest amount of outstanding AT1s.

The weekly performance of European bank equities continues to be deeply in the red:

• ING Groep NV ING exhibited the worst performance — down 17.3%)
• BNP Paribas BNPQY — down 14.5%
• BBVA BBAR — down 13.1%.

Weekly performance of European banking stocks – Chart: TradingView