UBS Agrees to Acquire Credit Suisse in a Bid to Save the Bank

Posted on 03/19/2023

UBS Group AG has agreed to buy Swiss banking giant Credit Suisse Holding AG. 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 3 billion Swiss francs (US$ 3.23 billion). It is an all share deal. The Swiss National Bank will loan UBS up to 100 billion Swiss francs (US$ 108 billion) to support the takeover, while the Swiss government will guarantee losses up to 9 billion Swiss francs. The takeover was made possible with the support of the Swiss federal government, the Swiss Financial Market Supervisory Authority FINMA, and the Swiss National Bank (SNB). The transaction is not subject to shareholder approval. UBS has obtained pre-agreement from FINMA, Swiss National Bank, Swiss Federal Department of Finance, and other core regulators on the timely approval of the transaction. Credit Suisse shares are listed in both New York and Zurich, but the Swiss government unilaterally moved to eliminate the voting rights.

The deal was earlier reported in the day as over US$ 2 billion.

Credit Suisse reportedly balked at UBS’ initial offer, but the bank was pressured by Swiss authorities about a scenario of a full or partial nationalization of bank.

The profound deal will send reverberations through various markets including the asset management and investment banking community. Likely, UBS will dramatically shrink Credit Suisse’s investment bank. Credit Suisse’s massive balance sheet is around twice the size of Lehman Brothers when it blew up. Credit Suisse had around 530 billion Swiss francs at the end of 2022.

Swiss-listed Credit Suisse is one of the world’s largest wealth managers and the 167-year-old bank was on the brink of a bank failure until Swiss National Bank stepped in to prevent further contagion. Credit Suisse was forced to tap US$ 54 billion in funding from the Swiss National Bank. Credit Suisse shares lost a quarter of their value last week. At close on Friday, Credit Suisse was valued at approximately 4 billion Swiss francs. Credit Suisse is deemed as a systemically important bank. The Federal Reserve and European Central Bank, along with the other smaller central banks have been keeping an eye on Credit Suisse.

There are some reports that Swiss authorities seek to amend the country’s laws to bypass a shareholder vote on the transaction as they rush to finalize a deal before Monday. The Wall Street Journal reports that in a bid to make the deal happen quickly, the Swiss National Bank has offered UBS a US$ 100 billion in liquidity to help it take on Credit Suisse’s operations. Keep in mind, Swiss National Bank has over US$ 200 billion in listed equities in their foreign reserves portfolio.

Government Shareholders
Credit Suisse touts a number of government funds as investors including the Qatar Investment Authority and Riyadh-based Saudi National Bank. In January 2023, QIA increased its ownership in Credit Suisse to 6.87% from 5.6%. QIA initially started investing in Credit Suisse during the time of the global financial crisis. Riyadh-based Saudi National Bank owns a 9.9% stake in Credit Suisse. Saudi National Bank is the result of the merger between National Commercial Bank and Samba Financial Group. Saudi National Bank has major shareholders such as Saudi Arabia’s Public Investment Fund (PIF) and Saudi Arabia’s General Organization for Social Insurance (GOSI). Middle Eastern investors had gradually replaced U.S. asset managers in the shareholder registry of Credit Suisse as Chicago-based Harris Associates L.P. (owned by Natixis Investment Managers) and Artisan Partners. BlackRock Inc. is the third largest shareholder of Credit Suisse at 4.07%, according to latest filings. Norges Bank Investment Management, which manages Norway Government Pension Fund Global, had a 1.49% stake in Credit Suisse Group AG at the end of 2022 and a 3.31% stake in UBS Group AG.

Credit Suisse experienced customer withdrawals of 123 billion Swiss francs in the fourth quarter of 2022 (around 38% of its deposits). This is after a string of scandals, legacy risk and compliance failures continued to haunt the Swiss bank.

UBS Shareholders
Singapore’s GIC Private Limited was once a major shareholder of UBS. The Singaporean sovereign wealth fund was a bailout investor in the bank back in 2008. According to the disclosure notifications filed with UBS and the SIX Swiss Exchange based on the Swiss Stock Exchange Act, on June 29, 2022, BlackRock had a holding of 5.23% of the total share capital of UBS Group AG. Norway’s sovereign wealth fund had around a 3.01% stake in UBS, according to recent filings.

A March 19, 2023, press release from SNB went out saying, “UBS today announced the takeover of Credit Suisse. This takeover was made possible with the support of the Swiss federal government, the Swiss Financial Market Supervisory Authority FINMA and the Swiss National Bank.

With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation. Both banks have unrestricted access to the SNB’s existing facilities, through which they can obtain liquidity from the SNB in accordance with the ‘Guidelines on monetary policy instruments’.

In addition, and based on the Federal Council’s Emergency Ordinance, Credit Suisse and UBS can obtain a liquidity assistance loan with privileged creditor status in bankruptcy for a total amount of up to CHF 100 billion.

Furthermore, and based on the Federal Council’s Emergency Ordinance, the SNB can grant Credit Suisse a liquidity assistance loan of up to CHF 100 billion backed by a federal default guarantee. The structure of the loan is based on the Public Liquidity Backstop (PLB), the key parameters of which were already decided by the Federal Council in 2022.

The substantial provision of liquidity will ensure that both banks have access to the necessary liquidity. By providing substantial liquidity assistance, the SNB is fulfilling its mandate to contribute to the stability of the financial system, and it continues to work closely with the federal government and FINMA to this end.”

AT1 or CoCos
Credit Suisse said 16 billion Swiss francs (US$ 17.24 billion) of its Additional Tier 1 (AT1) debt will be written down to zero on the orders of the Swiss regulator FINMA as part of its rescue merger with UBS. This essentially means that AT1 bondholders appear to be left with nothing while Credit Suisse shareholders will receive US$ 3.23 billion under the UBS deal. AT1 bonds are also known as contingent convertible bonds (CoCos). Common equity shares are below bonds in the priority ladder for repayment in a bankruptcy process. Created during the 2008 global financial crisis, AT1 bonds are a form of junior debt that counts towards banks’ regulatory capital. AT1 bonds were designed as a way to transfer risks to investors and away from taxpayers if a bank gets into trouble. AT1s pay higher interest as they carry more risk for investors than regular debt. The bonds can be converted into equity or written down when a lender’s capital buffers are eroded beyond a certain threshold. In this instance, FINMA agreed to let the AT1 bonds go to zero, so it would not create a liability for the bank.

The Credit Suisse AT1 bond wipe out is the largest loss yet for Europe’s US$ 275 billion AT1 market. Some Credit Suisse AT1 bondholders based off latest regulatory information include Pacific Investment Management Company, LLC (PIMCO), Invesco Ltd. and BlueBay Funds Management Co. Their holdings may have changed or been sold entirely since their last regulatory filings. Credit Suisse’s biggest CoCos were denominated in U.S. dollars and it had a US$ 2 billion perpetual note that could have been called in July 2023 and a US$ 2.25 billion note with a first call in December 2023. Interestingly, AT1 bonds comprise of around 28% of UBS’ regulatory capital.

NOTE: SWFI revised the transaction number when UBS released actual figures.

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