Existing Credit Suisse shareholders will get UBS shares as part of the all-share agreement arranged by the Swiss banking regulator via which UBS agreed to acquire Credit Suisse for CHF 3 billion (USD 3.3 billion).
The closing of the transaction is anticipated at the year's end, and UBS may not withdraw from the agreement under any circumstances. The Swiss government issued an urgent order to prevent Credit Suisse shareholders from voting on the deal.
UBS plans to keep Credit Suisse's successful Swiss banking branch and wealth management division while shrinking its investment banking arm, creating a merged entity with client assets worth USD 5 trillion. The goal is to better align the business model with UBS's emphasis on wealth management and its conservative risk tolerance.
The Swiss government has agreed to absorb any losses on assets being acquired by UBS as part of the agreement. The first CHF 5 billion in losses will be covered by UBS, while the Swiss government will pick up the tab for the remaining CHF 9 billion. UBS will cover any further losses.
The Swiss National Bank has agreed to give unlimited liquidity to both banks, and it has also agreed to offer UBS with an extra "liquidity support loan" of up to CHF 100 billion.
Why did the government try to force a merger between UBS and Credit Suisse?
The Swiss government pushed Credit Suisse and UBS to finalise the merger before this week's markets opened, despite early resistance from inside both companies.
Credit Suisse has been experiencing a crisis of confidence, and the merger was an attempt to stem the flow of customers and business partners away from the bank.
According to Reuters, at least four major banks reduced their trading activity with Credit Suisse before the agreement was announced.
Even though Credit Suisse has raised new equity capital and gained emergency liquidity assistance this year, clients have continued to pull more than USD 100 billion out of the bank in the fourth quarter of 2022.
Morningstar Direct also revealed that during March 13-15, 2023, Credit Suisse had net withdrawals of more than USD 450 million from its US and European-managed funds.
Given Credit Suisse's status as a worldwide systemically important bank, the step is also intended to avoid further loss of trust in the wider financial industry.
The response of the market
As taxpayer money was used to bail out Credit Suisse, the value of almost CHF 16 billion of the bank's additional Tier 1 (AT1) bonds will be erased. The Swiss government's move to reverse market convention—wherein shareholders normally bear the initial losses in a buyout, followed by bondholders—has been met with outrage by bondholders.
After trading recommenced following the agreement, banking shares across markets slumped, with Credit
Concerns regarding the USD 275 billion AT1 bond market were sparked by Suisse's AT1 bonds.
What does this mean to investors?
Full-blown systemic danger appears improbable notwithstanding recent unfavourable developments in the financial industry.
This government-led Credit Suisse transaction is a perfect illustration of how financial regulators, central banks, and governments are stepping in to avert further consequences.
Six major central banks, including the Federal Reserve System in the United States, have announced simultaneous moves to stabilise the financial sector.
Yet, for the time being, trust in the financial industry will be low. Banks in general will continue to endure more scrutiny and volatility, and it will take time for the market to regain trust.
Clients with Financials holdings should review their portfolios and consider rebalancing into lower-volatility solutions based on their individual risk tolerance.
Investors should construct robust portfolios to pursue their long-term financial goals and avoid concentrating their investments in any one sector or market.
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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Maiden Capital. The information provided is meant as a general guide only and should not be construed as investment advice. You should always consult your financial, legal and tax advisers regarding private equity and real estate investments