The issues underlying the UBS deal with Credit Suisse – Validus Risk Management’s Espregueira gets technical with AT1s and CoCos

by | Mar 22, 2023

Commenting on the issues underlying the UBS-Credit Suisse takeover, Validus Risk Management’s Matilde Espregueira, said: “In their haste to push the UBS-Credit Suisse deal through before Monday’s market open to secure financial stability and give confidence to global markets, regulators and the Swiss National Bank may find the deal they helped achieve has the opposite impact.

There are three key issues underlying the UBS-Credit Suisse takeover:

  1. Swiss authorities’ decision to change corporate laws to bypass a shareholder vote is problematic as the foundation of a well-functioning market is trust in the legal framework and corporate contracts. Changing corporate laws sends the message that: a) nothing is safe, as the rules of the game can be changed at any time, b) the systemic risk is far beyond what we imagined at the close of play on Friday, and c) we should prepare for a profound impact on shareholder rights and perceptions of risk globally.
  2. The initial takeover price discussed on Friday was said to be 0.25 SFR versus a close price 1.86 SFR. One way to interpret this is that those involved in the deal expect Credit Suisse stock to fall by more than 85 percent in the coming days… Reassuring? Perhaps not.
  3. UBS has requested a guarantee against any potential claims, lawsuits and fines that may arise from Credit Suisse’s past actions. Unless authorities yet again decide to change the laws to make any such fines and/or lawsuits invalid, Swiss taxpayers would find themselves liable to foot the bill.

Markets confirmed that hasty action has, indeed, led to unintended consequences.

Under the terms of the UBS-Credit Suisse merger, the value of Credit Suisse’s AT1 bonds was wiped out. This only served to further rattle global markets – the decision to pay nothing to AT1 contingent bond holders while shareholders received 0.76 SFR per share is, once again, akin to changing the rules of the game after it has begun. As a result, investors have adjusted their risk evaluation and portfolios by selling CoCo bonds, and prices have fallen as confidence in the debt instrument collapsed.

While still an evolving situation, when compared to the 2001, 2008, 2010 (EU) and 2020 crises, this current crisis seems to be the catalyst for the most change and damage to the financial framework due to decision makers’ reactions and haste.”

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