Nothing seems to save the Credit Suisse investor distrust. The shares of the troubled Swiss bank evaporated 57% only this Monday (20), even after the rival’s purchase announcement UBS Group for $3.2 billion.
This time’s problem is related to the bank’s ‘CDBs’, called AT1s. The price of these assets was set to zero by Swiss regulators.
By then, these AT1S were worth US$17 billion and were essential to finance the CS debt. However, the measure became part of the agreement by UBS.
With AT1s’ balance sheet crumbling, holders of the institution’s debt prepared for legal action against Credit Suisse. The bank is also likely to become the target of shareholders, forced to take on substantial losses because of the ‘hastily’ put together purchase deal on Sunday (19).
The urgency of the measure and the path it took show the “extreme fragility” that the CS found itself at the end of last week. This is what the CIO of TAG Investimentos, Dan Kawa, assesses, without going into the merits of the agreement.
“In a race against time, the Swiss government, led by the country’s Central Bank (SNB), made UBS buy CS for around 30% of the value of the quoted share on Friday. Some CS AT1 debt holders will suffer losses of 100% of their equity. The shareholders of both institutions were not consulted about the agreement, in an unprecedented change in the country’s laws for the purchase agreement to be implemented”, summarized the manager in a comment yesterday.
The AT1s portfolio had already been suffering from the financial institution’s crisis after the disclosure of “material weaknesses” in its balance sheet. In return, investors began to demand higher returns to assume the risk contained in the bank’s debt. Over the course of today, AT1 yields rose from 11% to 17%.
Credit Suisse sells for 2% of what it was worth in 2008
After rumors last week, UBS should really be the buyer of Credit Suisse. The acquisition is worth US$3.2 billion paid 100% in UBS shares. It is worth remembering that in the 2008 crisis, CS was worth US$ 100 billion.
According to Alex Lima, chief strategist at Investment Guide, “the guarantees for the deal are generous on the part of the government: the BC of Switzerland offers a liquidity line of 100 billion Swiss francs for UBS”. There is also compensation for losses of up to 9 billion francs sponsored by the Swiss taxpayer.
The extraordinary liquidity guarantees granted by the government of Switzerland to UBS conditions for the zeroing of Credit’s corporate debt securities, the AT1sincreasing UBS’s loss protection to CHF 25 billion.
The acquiring bank also added a material adverse impact clause, that allows the interruption of the acquisitionif the premium on bankruptcy protection bonds (Credit Default Swaps, CDS) from the UBS itself increase more than 100 basis points before the deal is completed. Since March 6, the yield on UBS’s 5-year CDS has risen by 70 basis points.
The strategist at Guide Investimentos assesses that it is still necessary to verify whether the default of the AT1s could trigger an insolvency event in UBS’s own CDS.
Largest BCs in the world united by liquidity
In addition, the world’s major central banks — including the Federal Reserve (Fed), European Central Bank (ECB), Swiss National Bank (SNB), Bank of Japan (BoJ) and Bank of England (BoE) — came together this Sunday (19) in a coordinated action to increase the liquidity provision of the market.
The proposition is that the BCs offer dollar exchange operations, as a way of supporting the proper functioning of the credit markets. The measure started from today and should continue until at least the end of April.
To improve the effectiveness of swap lines (operation in which positions are exchanged when there is risk for the investor), Central banks that offer dollar operations have agreed to increase the frequency of these operations.s by doing them daily instead of weekly.
I am an author and journalist with a focus on market news. I have worked for a global news website for the past two years, writing articles on a range of topics relating to the stock market. My work has been published in international publications and I have delivered talks at both academic institutions and business conferences around the world.