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UBS has begun sounding out investors about issuing a bond that was wiped out in the bailout of Credit Suisse six months ago — a writedown that hurt market confidence and triggered a wave of lawsuits.
UBS executives have been on an investor roadshow after reporting quarterly results last month. During the discussions, they suggested changing the terms of future additional Tier 1 securities to make them more acceptable to bondholders, according to people familiar with the matter.
UBS is under pressure to replace up to $17 billion of Credit Suisse AT1 bonds over the next few years to make the bank’s enlarged capital structure more efficient and free up funds for shareholder returns and potential acquisitions.
But some investors remain wary as the Swiss government’s emergency law allows the country’s financial regulator Finma to protect shareholders at the expense of AT1 holders, causing bondholders to lose dozens during the Credit Suisse bailout. One hundred million U.S. dollars.
The decision shook up the traditional hierarchy of bank creditors and undermined confidence in AT1. AT1 was introduced in the wake of the financial crisis, when regulators sought to shift risk away from depositors and impose higher capital requirements on banks in the event of a bank failure.
“UBS is working frantically in the background to resolve this issue,” said one bond fund manager who recently met with representatives from the bank. “They need to convince investors that the capital structure will not be reversed and the rules will not be changed again at the last minute.”
One option being considered is to replace UBS’s AT1 bonds with versions of securities that are convertible into equity and are designed to be written down if the bank gets into trouble, according to two people involved in investor discussions.
“If that were done, the equity conversion would probably be better and there would be more demand,” said another bond investor. “But we’re not naive and don’t think it will change the risk.”
AT1 has no maturity date, but the issuer can typically call it every five years. AT1 is usually called when the bank has the ability to reissue a replacement. UBS has S$700 million (US$510 million) in bonds, callable at the end of November, and US$2.5 billion in bonds, callable at the end of January.
UBS Group AG posted a $29 billion profit in August, a record quarterly profit for the bank, on accounting gains from the Credit Suisse acquisition, and Chief Executive Sergio Ermotti said the bank was Weighing when to re-enter the AT1 market.
“We are watching the market carefully,” he said. “We will assess the timing and need for market expansion in due course.”
After Credit Suisse’s AT1 holders suffered losses, the European Central Bank and the Bank of England quickly announced that they would not destroy the bank’s bonds, as Finma had done.
As a result, euro zone banks such as BNP Paribas, BBVA and Bank of Cyprus found it easy to find buyers when they re-entered the AT1 market over the summer.
Although AT1 lending has accelerated since Credit Suisse’s AT1 was phased out, issuance is slower this year than last year, London Stock Exchange data shows.
But given Finma’s unprecedented decision, investors said UBS would be under pressure to ease risk concerns.
“They have to make their bonds as beneficial to investors as possible,” said one bond manager participating in the UBS roadshow. “They also have to pay a premium.”
“I think they can get the deal done,” another investor said. “UBS is now clearly an absolutely massive bank, probably too big to fail and too big to save for the Swiss economy, given its size.”
The investor added: “I do think, though, that come March, some investors are going to be scarred and they’re going to say, ‘No, actually, these actions are not where I want to invest my money’.”
UBS declined to comment.
A group of international bond investors who lost billions due to the collapse of Credit Suisse are formulating plans to sue Switzerland in a U.S. court, the Financial Times reported on Friday.
