UBS makes offer for Credit Suisse; bondholder losses considered

UBS Group is in emergency talks to buy fellow Swiss banking giant Credit Suisse as authorities bid to stave off turmoil when global markets reopen on Monday, March 20, with reports saying UBS has offered to pay up to $1 billion.

Swiss authorities are examining imposing losses on Credit Suisse bondholders as part of a rescue, two sources with knowledge of the matter said on Sunday, March 19, while European regulators are apprehensive for fear it could hit investor confidence elsewhere.

Authorities have been racing to rescue the 167-year-old bank, among the world’s largest wealth managers, after a brutal week that saw the second and third largest US bank failures in history. As one of 30 global banks seen as systemically important, any deal for Credit Suisse could ripple through global financial markets.

Bloomberg News, citing people with knowledge of the matter, said Credit Suisse was resisting the offer of up to $1 billion, believing it to be too low and that it would hurt shareholders and employees who hold deferred stock. If the takeover falls apart, Switzerland is considering taking over the bank in full or holding a significant equity stake, Bloomberg reported.

Credit Suisse and UBS declined to comment, and the Swiss government did not immediately respond to a request for comment.

The Financial Times reported that the all-share deal was set to be signed as early as Sunday. Citing people familiar with the matter, it said an offer made on Sunday was of 0.25 Swiss francs ($0.27) per Credit Suisse share, well below the closing price of 1.86 Swiss francs on Friday, March 17, and all but wiping out the bank’s existing shareholders.

UBS has also insisted on a “material adverse change” that voids the deal in the event its credit default spreads jump by 100 basis points or more, the report added. It said there was no guarantee that terms will remain the same or that a deal would be reached.

A person with knowledge of the talks earlier told Reuters that UBS sought $6 billion from the Swiss government as part of a possible purchase of its rival. The guarantees would cover the cost of winding down parts of Credit Suisse and potential litigation charges.

One source previously said the talks were encountering significant obstacles, and 10,000 jobs may have to be cut if the two banks combined. The Swiss Bank Employees Association on Sunday called for the immediate creation of a task force to deal with the risk to jobs.

Swiss broadcaster SRF and other media reported that the government would hold an “important” press conference later on Sunday. They did not give any more details.

Credit Suisse shares lost a quarter of their value in the last week. The bank was forced to tap $54 billion in central bank funding as it tries to recover from a string of scandals that have undermined the confidence of investors and clients.

Bondholder losses

A final decision on imposing losses on bondholders has not been taken, and the terms could still change, according to sources. Losses imposed on bondholders may need to be larger if Credit Suisse were wound down rather than if it were taken over by UBS, one of the sources said.

Despite that prospect, bond investors are hopeful that a takeover by UBS would mean their Additional Tier 1 bonds are converted into UBS stock and more of their money protected, two bondholders told Reuters.

“If Credit Suisse fails, that would pose a significant systemic issue for bondholders, as it would be hard for them to stomach the failure of a bank when it’s not sitting on unrealized investment losses like in the US,” said Jerome Legras, head of research at Axiom Alternative Investments, an investor in Credit Suisse’s AT1 debt.

The fraught weekend negotiations follow efforts in Europe and the United States to support the sector since the collapse of US lenders Silicon Valley Bank (SVB) and Signature Bank.

US President Joe Biden’s administration moved to backstop consumer deposits while the Swiss central bank lent billions to Credit Suisse to stabilize its balance sheet.

The plan could see Credit Suisse’s Swiss business spun off, while Bloomberg reported that the takeover talks were throwing into doubt plans to hive off its investment bank under the First Boston brand.

US authorities are working with their Swiss counterparts to help broker a deal, Bloomberg reported, while Sky News said the Bank of England has indicated to international counterparts and to UBS that it would back the proposed takeover of Credit Suisse, which counts Britain as a key market.

Forceful response

The failure of SVB brought into focus how a campaign of interest rate hikes by the US Federal Reserve and other central banks – including the European Central Bank on Thursday, March 16 – was pressuring the banking sector.

SVB and Signature’s collapses are the largest bank failures in US history behind the demise of Washington Mutual during the global financial crisis in 2008.

The S&P Banks index has fallen 22% in its largest two-week slide since the pandemic shook markets in March 2020.

US banks have sought a record $153 billion in emergency liquidity from the Federal Reserve in recent days and big lenders threw a $30-billion lifeline to smaller lender First Republic.

In Washington, the focus has turned to greater oversight to ensure banks and their executives are held accountable with Biden calling on Congress to give regulators greater power over the sector. – Rappler.com