European bank bondholders are considering legal action after the shotgun takeover of Credit Suisse by arch-rival UBS on Sunday wiped out the value of a riskier layer of debt, which contributed to a febrile mood around the health of banks.
UBS shares initially fell 16% amid concerns it faces a tough integration challenge after agreeing to pay SFr3bn (US$3.2bn) for 167-year-old Credit Suisse and assuming up to US$5.4bn in losses, in a deal orchestrated by Swiss authorities and approved by other major regulators around the world in an effort to stop a banking crisis from spreading.
But the shares regained ground and by mid-afternoon in Zurich UBS shares were up 2% at SFr17.5 as bank stocks steadied across Europe. Credit Suisse shares fell 58% to SFr0.79, just above the cut price UBS is paying for the stock.
The treatment of bondholders shocked investors, however. Swiss regulator Finma said about SFr16bn of Credit Suisse’s Additional Tier 1 capital will be written off to zero under the deal.
Law firm Quinn Emanuel said it is in discussions with a number of holders of the AT1 instruments "about the possible legal actions that may be available to them in light" of the takeover.
It said the investors represent "a significant percentage" of the total notional value of AT1 instruments issued by Credit Suisse. A call for bondholders is likely to take place on Wednesday to discuss options.
The market was stunned by what will be the largest ever writedown of a bank's AT1s.
UBS chairman Colm Kelleher said the bank had been committed to its organic growth strategy but regulators had urged it to step in after recent events at Credit Suisse.
"Various events over the last few weeks resulted in regulators across the world urging UBS to consider a takeover of Credit Suisse to preserve global financial stability," Kelleher told investors on a conference call late on Sunday.
UBS said the takeover would not change its strategy and it will have a "focused investment bank" providing products for institutional and wealth management clients. "That position has not changed. We will be extremely selective in the trading and derivative assets we take into our investment bank," UBS CEO Ralph Hamers said.
UBS said strategic investment banking businesses will be retained – notably strong areas in the Americas and technology sector – but the majority of Credit Suisse's markets positions will be moved to a non-core unit and wound down. It said the combined investment banking businesses will account for about 25% of group risk-weighted assets.
It is expected that the group will continue with many elements of Credit Suisse's specific restructuring measures, such as the sale of most of its structured products group to a consortium led by Apollo. Last week Credit Suisse chief executive Ulrich Koerner said SFr40bn of its SFr55bn assets had been transferred. It is unlikely that the US$210m purchase of advisory boutique M Klein & Co to create the core of a new investment banking unit CS First Boston will proceed.
“Clearly, the real challenge here is the rundown of the investment banking activities," said Hamers, explaining why UBS has obtained downside protection. “It's an important factor of creating value by making sure that we refocus that investment bank in the way we have ours – refocus our investment bank in terms of having the capabilities and developing the capabilities also to the wealth franchise. That will be quite some work."
Sarah Youngwood, chief financial officer at UBS, said: “In terms of the rundown, we will definitely be very decisive and very fast. It is definitely our desire to find solutions. But at the same time, some of the positions are extremely long-dated and embedded in the system, which is why we wanted to also be realistic and transparent.
"This is not the type of portfolio which you can simply offload tomorrow morning. And so we will preserve value. When we say in a hurry, it's not at all that we have to do it. It is just that we would like to put it behind [us], but we will be very rational about how we execute.”
Bonuses paid
Credit Suisse shareholders will receive one UBS share for every 22.48 Credit Suisse shares, equivalent to SFr0.76 a share and a total of SFr3bn. Credit Suisse shares had closed on Friday at SFr1.86.
Credit Suisse staff are set to receive bonuses and pay awards that were previously announced. Bonuses for 2022 have been paid everywhere apart from Switzerland, and they will be paid there this month. Many of the awards are in shares, however, which are worth less after the takeover, and will be exchanged into UBS shares when the deal completes.
About 500 of Credit Suisse's top staff were due to share an award of about SFr350m to keep them at the bank for the next few years under plans announced this month, but that "Transformation Award" is now dead.
Insiders said the mood at Credit Suisse was emotional after such a sudden collapse, twinned with uncertainty about job prospects. Credit Suisse was already in the process of cutting 9,000 jobs, and the scale of cuts could be even greater now. The bank had 50,500 staff at the end of last year.
The bank has told staff to continue operating as normal. Insiders said although UBS faces a lot of execution risk with the investment bank integration, the deal could offer a lot of upside. It will be by far the biggest global wealth manager and have a dominant presence in Switzerland, which are both lucrative businesses.
Under normal circumstances, UBS would never have been allowed to build such an overwhelming domestic presence, although bankers in Switzerland said there will be disquiet in the countryside. "Everyone is a bit worried about what's happening with all these branches and the employees. Nearly every single village has a church, a pub, a supermarket as well as a UBS and a CS branch," said one banker.
In a note, Jefferies analysts said. ""The low price paid and significant safety net provided to UBS (with government guarantee) are positive, while UBS' strategy is unchanged. However, UBS embarks significant execution risk, litigation risk, the buyback is temporarily suspended (unclear how long), UBS' capital requirement is likely to be revised up, and management focus will be captured by this deal for many quarters, maybe years."
In its statement, Credit Suisse said it expected the deal to complete by the end of the year. Hamers said that UBS expects "approvals to be expedited to close the deal as soon as possible".
Hamers said the integration of businesses is likely to take three to four years. UBS said the transaction is expected to be earnings accretive by 2027 and it expects to achieve annual cost savings of more than US$8bn by that date.
Kelleher, a blunt Irishman who joined UBS in April 2022 after 30 years at Morgan Stanley (including as president, CFO and head of wealth management and the investment bank), said the terms of the "emergency rescue" of Credit Suisse will limit UBS' downside exposure. UBS said it has SFr25bn of downside protection to support markdowns, purchase price adjustments and restructuring costs, and an additional 50% downside protection on non-core assets. It will have unrestricted access to the Swiss National Bank's existing facilities, through which it can obtain liquidity.
The combined Swiss mega-bank will have more than US$5trn in total invested assets and be easily the world's leading wealth management operation, with more than US$3.4trn in invested assets. It will also be the leading universal bank in Switzerland. Hamers said the takeover will enhance UBS' growth ambitions in the Americas and Asia while adding scale in Europe as well as filling some gaps in its investment bank.
"There are capabilities in specific sectors that we were focused on and where we were even hiring and plan to hire. Actually, quite some gaps there are filled both on the research side as well as on the banking side with this acquisition and through which we can actually accelerate part of our growth that we were planning for in the US as well," he said.
Hamers will be CEO of the enlarged group and Kelleher will be chairman.
Centerview is advising Credit Suisse, according to Refinitiv, with Morgan Stanley and JP Morgan advising UBS.
Adds detail on threat of legal action, details thoughout