UBS ventures into AT1 bonds market post Credit Suisse takeover

Category: Americas Europe Forex

UBS has embarked on its first journey into the world of additional tier 1 (AT1) bonds, marking a significant development following its takeover of rival lender Credit Suisse. This move comes in the wake of a massive write-off of US$17 billion worth of high-risk debt instruments, a consequence of the merger.

UBS has announced an enticing opportunity for investors by launching a new deal to raise dollar-denominated AT1 bonds. These bonds come with a dual maturity structure, allowing investors the flexibility to opt for redemption in either five or ten years. AT1 bonds, renowned for their perpetual maturities, are designed to withstand financial turbulence and absorb losses during times of crisis.

The backstory to this initiative is the decision made by Swiss authorities earlier this year, which led to the writing down of US$17 billion in Credit Suisse’s AT1 bonds. This move was a critical condition that accompanied the shotgun marriage between Credit Suisse and UBS, and it sparked significant controversy and uproar within the financial community.

The fallout has also given rise to a number of litigations as stakeholders grapple with the implications and repercussions of this massive write-down.

Five-year tranche

UBS has chosen to market its latest AT1 bond offering with an attractive yield strategy. The five-year tranche is currently being offered with a yield of approximately 10 percent, which presents a compelling opportunity for investors seeking attractive returns. Meanwhile, the ten-year option offers a slightly higher yield at about 10.125 percent, appealing to those looking for a longer-term investment horizon.

This move by UBS reaffirms its commitment to the AT1 bonds market, signalling its willingness to engage in this financial instrument, even in the wake of the Credit Suisse takeover and the tumultuous events that followed. It will be interesting to see how this venture into the AT1 bonds market unfolds and what it means for the bank’s financial future in the years to come.

Integration challenges and losses

UBS faced a substantial setback in its latest financial report, revealing a US$ 785 million loss for the third quarter, primarily attributed to the costs associated with the recent Credit Suisse takeover. The US$ 2 billion expenses incurred underline the complexity of absorbing a struggling rival.

While UBS anticipates a reduction in these costs as integration progresses, addressing the longstanding issues in Credit Suisse’s business remains a formidable challenge. UBS CEO Sergio Ermotti acknowledged the structural challenges, emphasizing his confidence in a positive outcome.

Despite the current losses, a 4 percent increase in UBS shares suggests investor optimism, bolstered by a robust inflow of funds from clients.

Client confidence

Despite the integration hurdles, UBS witnessed a substantial net new money inflow of US$22 billion into its global wealth management business during the quarter.

Net deposits of US$33 billion flowed into the entire UBS group, with two-thirds originating from legacy Credit Suisse clients. This surge indicates client trust and confidence, a sentiment echoed by CEO Sergio Ermotti, (in photo above), who remains optimistic about the bank’s future. The positive client sentiment, despite the challenges, positions UBS for growth as it aims to build a stronger and safer financial institution, marked by the successful stabilization of the financial system during the Credit Suisse rescue in March.

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