After two days of playing table tennis with clients' savings and investments held by failed bank Credit Suisse, the price for acquisition by UBS (formerly Union Bank of Switzerland,) has been agreed at CHF 3BN (US$3.25 billion), or 0.76
per share, meaning shareholders of Credit Suisse will receive 1 share in UBS for 22.48 shares in Credit Suisse. As part of the deal, the
Swiss National Bank is offering a 100 billion-franc liquidity
assistance to UBS while the government is granting a 9 billion-franc
guarantee for likely losses on dodgy assets that are part of the deal. In effect
this is a taxpayer-funded bailout (but don't call it that.)
This
wipe out bail-in will be the biggest loss yet for Europe’s $275
billion AT1 market, far eclipsing the approximately €1.35
billion loss suffered by junior bondholders of Spanish lender Banco
Popular SA back in 2017, when it was absorbed by Banco Santander SA to
avoid a collapse.
AT1 bonds were introduced in Europe in the wake of the 2014 global financial crisis to serve as a backstop when banks start to fail. They are designed to shift losses to bondholders or be converted into equity if a bank’s capital ratios fall below a viable level, effectively padding its balance sheet and allowing it to stay in business.
The bonds were by Friday already trading at levels usually reserved for companies about to go bust. A slice of the bank’s $1.65 billion note, issued less than a year ago, changed hands at about 35 cents on the dollar, according to trade reporting system Trace.And while it may be counterintuitive, according to the Swiss bail-in regime, AT1 debt is above equity in the loss absorption waterfall.
All this is very vague and technical but what it means is that while the takeover is agreed in principle, the deal may yet fall apart is, as banking industry insiders have warned, more nasties emerge as UBS auditors scrutinise the accounts of Credit Suisse. Once a paragon of banking integrity, Credit Suisse has been known to be in trouble for over a decade and has only stayed afloat this long due to certain creative accounting practices of dubious legality disguising the black holes in its balance sheet.
What is truly frightening is that many more banks are rumoured to be in similar or even worse trouble due to reckless lending during the years of insanely low interest rates.
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