To prevent a crisis of confidence from threatening global financial markets, UBS, brokered by the government, agreed to a historic deal to buy Credit Suisse for 3 billion Swiss francs ($3.25 billion), less than what Credit Suisse last Friday ( 17) half of the market value of 7.4 billion Swiss francs.
UBS agreed to a CHF3 billion all-share deal that included extensive government guarantees and liquidity provisions. The price per share is down 99% from Credit Suisse’s 2007 peak.
According to the statement, UBS will acquire Credit Suisse for 0.76 Swiss francs per share, for a total price of 3 billion Swiss francs. Credit Suisse shareholders will exchange 22.48 Credit Suisse shares for 1 UBS share, and the merger between Credit Suisse and UBS will be completed by the end of 2023.
The Swiss National Bank will provide UBS with 100 billion Swiss francs of liquidity assistance, while the government will provide 9 billion Swiss francs in guarantees for potential losses on assets taken over by UBS. Swiss financial regulator Finma said Credit Suisse’s bonds, worth about 16 billion Swiss francs, would be fully written down, meaning rendered worthless, to ensure private investors would help share the losses.
This will be the largest write-down in the US$275 billion AT1 market in Europe.The scale of the loss far exceeds the 1.35 billion on Spanish bank Banco Popular SA bonds in 2017.EURWrite down, when the bank was acquired by Santander. AT1 bonds were introduced in Europe after the financial crisis to cover losses in the event of bank failure. If the bank’s capital adequacy ratio falls below a certain level, holders of such bonds face permanent losses, or the bonds are converted into equity.
The plan, struck during hastily arranged crisis talks over the weekend, is aimed at addressing a client exodus following the collapse of small U.S. banks over the past week and a sharp drop in Credit Suisse shares and bonds.
UBS said that after the merger with Credit Suisse, UBS’s current chairman Colm Kelleher and CEO Ralph Hamers will each hold the same position in the new company. The combined company’s total investment assets will exceed $5 trillion, and the merger is expected to reduce the company’s annual costs by more than $8 billion by 2027.
The Swiss central bank’s liquidity support in the middle of the week failed to save market confidence, so they decided to eliminate it directly before the crisis expanded.
Given Credit Suisse is a systemically important bank, “it is imperative that we act quickly and find a solution as soon as possible,” SNB President Thomas Jordan told a news conference later on Sunday.
UBS Chairman Colm Kelleher said that he will shrink Credit Suisse’s investment banking business, which has been losing money in recent years, and retain Credit Suisse’s Swiss Universal Bank, which has performed better.
“Let me be more specific, UBS intends to scale back Credit Suisse’s investment banking business to be consistent with our conservative risk culture,” Kelleher said at a news conference announcing the deal.
