UBS eyes Tier 2 low trigger CoCo

Swiss bank UBS said on Tuesday it planned to issue a loss-absorbing capital bond, and has started arranging self-led investor meetings in Asia and Europe ahead of a deal that could surface as soon as next week.

UBS “intends to issue loss-absorbing capital in 2012 as a step towards meeting the Swiss regulator’s requirement that systemically important banks hold up to 19% in total Basel III capital in future”, it said in announcing full-year results this morning.  

Under the so-called Swiss finish, Switzerland’s large banks need to have 10% Common Equity Tier 1 capital, plus a buffer of 3% high-trigger contingent (if the Tier 1 falls below 7%) and a secondary buffer, low-trigger contingent of 6% (if the Tier 1 ratio drops below 5%).

UBS is said to be eyeing a Tier 2 instrument with a 10-year maturity which will be for the low-trigger buffer. The bonds can be written down permanently if the bank’s common equity Tier 1 ratio falls below 5%. The deal will be the first new money low-trigger contingent capital issue out of Europe.         

Credit Suisse priced the first contingent capital trade from Switzerland in February last year. However, while the Credit Suisse trade was a Tier 2, it was a high-trigger contingent capital issue, making it riskier for investors.

The Credit Suisse bonds convert into equity if the bank’s common equity Tier 1 ratio falls below 7%, and was seen as going-concern capital and not gone-concern capital.

UBS Chief Financial Officer Tom Naratil told journalists at a press conference today that his bank would issue loss-absorbing capital to meet tough new Swiss capital rules fairly quickly, and that it still preferred non-dilutive forms of capital such as write-down debt over contingent convertible bonds, or CoCos. He said he expected the deal size to be US$1bn.

Discussions on pricing have yet to begin. But the key difference for UBS is that, unlike Credit Suisse and other recent hybrid deals from the likes of Zuercher Kantonalbank and Rabobank, it will be a Tier 2 with a low trigger rather than a Tier 1.

Swiss financial regulator FINMA has already set out capital standards for the banking sector, in contrast to the rest of Europe, which is still waiting for the final version of Basel III under CRD4, not expected until the summer.