UBS is elevating further tier 1 bonds for the primary time since $17bn value of the dangerous financial institution debt was worn out when it took over rival lender Credit score Suisse.
The Swiss financial institution on Wednesday supplied two new dollar-denominated AT1 bonds, cut up between debt that may be redeemed in 5 years and 10 years.
The sale marks a giant check of investor demand for the market, which was shaken in March when the takeover of Credit score Suisse by UBS resulted in $17bn of Credit score Suisse bonds being worn out.
So-called AT1 bonds, a sort of financial institution debt designed to take losses throughout a disaster, have been launched after the 2008 monetary disaster to make sure that bondholders would take a few of the losses from a financial institution failure, quite than depositors or taxpayers. The Credit score Suisse writedown was controversial as a result of bondholders argued that strict situations of their contracts, which triggered the wipeout, weren’t met.
UBS, which reported its first quarterly loss in six years on Tuesday because it was weighed down by the prices of taking on its former rival, is below strain to problem billions of recent AT1s within the coming years to make its layers of financial institution capital extra environment friendly.
UBS lowered the choices on the 2 bonds, to round 9.625 per cent yield on the five-year tranche, and 9.75 per cent on the 10-year, from its preliminary providing of greater than 10 per cent as buyers sought to purchase the new debt.
The brand new AT1s will likely be issued below Swiss regulation and could be transformed to fairness quite than being written off ought to the financial institution run into difficulties. However that situation will likely be activated solely after the phrases are signed off at UBS’s annual assembly subsequent 12 months.
The financial institution mentioned: “We’ll present further data when the providing is full.”
S&P gave the brand new UBS AT1 a BB ranking, 5 notches under its A- credit standing on the financial institution.
“The phrases and situations of UBS Group AG’s AT1 points along with the legislative framework give the Swiss authority the potential to find out whether or not a viability occasion has occurred, even when the capital ratio threshold has not been breached,” mentioned the ranking company.
Swiss authorities’ choice to jot down down $17bn of Credit score Suisse’s AT1 bonds in March, as a situation of its shotgun marriage to UBS, has led to at the least $9bn of authorized claims, together with ones towards Finma, Switzerland’s monetary regulator, and the nation itself.
UBS executives began sounding out investors over issuing new AT1s in September following the publication of the financial institution’s mid-year outcomes, the Monetary Instances beforehand reported.
Filippo Alloatti, head of financials credit score at Federated Hermes, estimated UBS had an AT1 shortfall of about $11bn and mentioned the bond’s potential conversion to fairness was “constructive”.
“Following the Credit score Suisse [collapse], buyers have been pushing for a change . . . away from the ‘sudden loss of life’ everlasting writedown they skilled with Credit score Suisse,” he mentioned.
AT1s don’t have any maturity date however can usually be repaid after a set time interval. Banks often repay AT1s when they can and reissue replacements.
After Credit score Suisse’s AT1 holders have been left with losses, the European Central Financial institution and Financial institution of England have been fast to announce they’d not have worn out the financial institution’s bonds as Finma did.
Consequently, eurozone banks akin to BNP Paribas, BBVA and Financial institution of Cyprus discovered it straightforward to seek out consumers once they re-entered the AT1 market through the summer season.
On Tuesday, French lender Société Générale issued a dollar-denominated AT1 that was anticipated to quantity to at the least $500mn. One bond fund supervisor mentioned that the $7bn of demand for that deal most likely spurred UBS’s choice to launch its personal AT1 bond sale.