What was initially a 1 billion Swiss francs acquisition price for Credit Suisse by UBS, which then grew to 2 billion Swiss francs, has now increased to 3 billion Swiss francs (US$3.25 billion). As a result, Credit Suisse shareholders will get 0.76 shares of UBS for every 22.48 Credit Suisse shares. In addition, as part of the agreement, the Swiss National Bank provides UBS with 100 billion Swiss francs in liquidity support, while the government offers a 9 billion franc guarantee for any losses on assets UBS is acquiring; this is a taxpayer-backed rescue.
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Notably, the bank’s entire AT1 tranche – approximately 16 billion Swiss francs of Additional Tier 1 (AT1) bonds, in a $275 billion market – will be bailed in and written down to zero as “FINMA has determined that Credit Suisse’s Additional Tier 1 Capital (derived from the issuance of Tier 1 Capital Notes) will be written down to zero.”
This wipeout, or a bail-in, is the worst loss in the history of Europe’s $275 billion AT1 market, dwarfing the approximately €1.35 billion loss experienced by junior bondholders of Spanish lender Banco Popular SA in 2017 when Bank Santander SA purchased it to avert bankruptcy.
AT1 bonds, also known as “contingent convertibles” or “CoCo,” were created in Europe during the global financial crisis to serve as shock absorbers should banks begin to collapse. They are meant to convert into equity or inflict permanent losses on bondholders if a bank’s capital ratios fall below a predefined threshold, essentially propping up its balance sheet and allowing it to remain in operation.
UBS acquires its biggest Swiss rival
From the UBS perspective, the merger is anticipated to produce a company with more than $5 trillion in total invested assets and sustained value prospects. In addition, it will reinforce UBS’s position as the top global wealth manager based in Switzerland, with more than USD 3.4 trillion in total invested assets, operating in the most attractive growth areas.
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The deal strengthens UBS’s position as Switzerland’s premier universal bank. The merged firms will be a top asset manager in Europe, with more than USD 1.5 trillion in invested assets.
UBS Chairman Colm Kelleher said: “This acquisition is attractive for UBS shareholders, but let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue. Acquiring Credit Suisse’s wealth, asset management, and Swiss universal banking capabilities will augment UBS’s strategy of growing its capital-light businesses.”
The forced bail-in sale of Credit Suisse to UBS will result in a stunning number of layoffs in the following weeks or months due to significant overlaps between the two banks. Prior to the transaction, Credit Suisse was already in the process of reorganizing, laying off around 9,000 people. However, Bloomberg cites individuals with knowledge of the matter as saying that the bank’s job cuts might now escalate.
The two banks have around 125,000 workers, of which 30% are situated in Switzerland. The combination produces great redundancy in certain divisions, and people foresee big layoffs.
As a result of the merger, UBS’ stock price dropped circa 10% in Switzerland, only to erase all the losses and it it was trading notably higher during the US session.
UBS daily chart, source: author´s analysis, tradingview.com