UBS to buy CS for $3.3 Billion Amidst Small-Medium Banks Crisis
Alex Lehmann and Colm Kelleher in a news conference in Bern, Switzerland, on March 19. Photo: Pascal Mora/Bloomberg.
On Sunday, March 19, UBS announced the acquisition of Credit Suisse in a 3.3 billion francs ($3.2 billion) Swiss-government-brokered deal, ending the Credit Suisse Crisis and the ongoing banking confidence collapse that has spread across the global financial market, especially in small-medium banks.
The Zurich-based multinational investment bank negotiated the deal with the Swiss government and Credit Suisse in several hasty crisis talks over the weekend. UBS will be paying $3.2 billion to acquire its closest rival in an all-share deal that covers both government guarantees and liquidity provisions. In the meantime, the Swiss National Bank will provide 100 billion francs of liquidity financial support to UBS on top of the 9 billion-franc guarantee the Swiss government promised. While the equity's value and the senior unsecured debt remain outstanding, the regulator pulls the trigger to write down Credit Suisse bonds to transfer the risks from the general taxpayers to private investors. FINMA determined that Credit Suisse's situation meets the condition to trigger a total write-down of AT1 bonds, meaning that about 16 billion francs of Credit Suisse bonds will become worthless after the acquisition. The plan aims to contain client outflow and share price plunge in Credit Suisse's stock and bonds following the small-medium US banks and lenders' crisis. So far, the deal has garnered support from several central banks in this sensitive time for the global banking system, including Federal Reserve and European Central Bank. There's significant government involvement in this deal, and the acquisition is an effort from the Swiss government to address the crisis of confidence in the global financial market.
Credit Suisse's latest stock price drop and client outflow were the result of compounding several recent events, including SVB and US medium banks' collapse. It began when the US-based Silicon Valley Bank was stuck with high-risk investments yet faced a large flow of withdrawal requests from its client. Most SVB's deposits are invested in hold-to-maturity securities, giving them low liquidity during the unfavorable macro environment in which Fed has announced several rate hikes. Silicon Valley Bank's large proportion of unsecured deposits soon backfired and caused its bankruptcy, resulting in the second-biggest bank failure since the collapse of Washington Mutual in the Great Financial Crisis of 2008. Soon after, four banks collapsed one after another while pressure on other smaller lenders like First Republic Bank mounted. The accelerating loss of confidence led to asset and client outflow in Credit Suisse. "The latest developments that emanated from the banks in the U.S. hit us at the most unfavorable moment," said Credit Suisse Chairman Axel Lehmann during a press conference.
The damage to the Swiss lender was compounded when Credit Suisse announced that it had "material weaknesses" in the financial reporting procedures. FINMA and Credit Suisse were both under scrutiny as it'd been uncovered that the bank had suffered from losses and scandal for decades yet produced reports that understated the situation. To make matters worse, Saudi National Bank, which previously bailed out Credit Suisse when it was under fire, confirmed that it would stop providing any financial support to Credit Suisse. Swiss National Bank soon announced a loan of 50 billion francs to help contain the drama. Eventually, the liquidity backstop failed as the market threatened to send the counterparties fleeing, followed by the aforementioned weekend deal talks that resulted in the UBS acquisition of Credit Suisse. With the support and positive feedback from the Fed, Treasury Department, and European Central Bank, the transaction is expected to be completed by the end of the year, per Credit Suisse.
Press conference for the UBS takeover in Bern, Switzerland, on Sunday, March 19. Photo: Pascal Mora/Bloomberg/Getty Images.
The deal and its background significantly impact the current macro environment and give a strong signal to the regulators as the Swiss Central Bank broke the silence in taking early action to solve the liquidity crisis. The Fed and five other central banks followed suit with a coordinated action on Sunday to boost liquidity in the USD swap deal, easing growing strains in the banking system. With the hastily arranged schedule during which the deal was made, there's virtually no time for UBS to do the due diligence work involved in a typical merger and acquisition deal. As a result, the loss guarantee and liquidity relief from the Swiss Central Bank prove to be more important than ever. In the case of losses after winding down Credit Suisse's assets, UBS is only obligated to assume the first 5 billion francs and the federal government, the next 9 billion. The Swiss Central Bank also did a great job ensuring that private investors shoulder the risk of further losses by triggering AT1 bonds write down. AT1 is a specific financial instrument that converts into equity given certain conditions. The AT1 bond prevailed after the 2008 GFC, mainly due to its clause to trigger a total write-down if the regulator, in this case, FINMA, determined that there was an adverse viability event. Since the write-down will make the bonds worthless, private investors who bought the AT1 bonds will suffer from the risk of financial crisis instead of taxpayers.
The collapse of the 166-year-old Swiss lender marks a significant page in the history of global finance. Credit Suisse has had a long-standing history as a global powerhouse representing Switzerland's role in global financial markets. Since emerging from a state bailout during the 2008 GFC, Credit Suisse's latest decade has been surrounded by scandals, losses, and leadership changes. While the takeover is shocking news, it shows the system's stability and the effort from regulators to avoid a repeat of the GFC. "This was the possible solution," Swiss Finance Minister Karin Keller-Sutter told the press, saying this is an important step to stabilize international financial markets.