Mar 22, 2023
UBS Offers to Buy Back Some of Its Own Bail-In Notes
(Bloomberg) -- UBS Group AG is offering to buy back bonds that were issued days before it agreed to take over troubled rival Credit Suisse Group AG, a deal that sent a gauge of its credit risk soaring.
Switzerland’s biggest bank invited holders of $3 billion of its senior bonds to sell them back after acquisition in an effort to calm concerns over the risks of the deal. While shareholders have cheered UBS picking up its rival at a very cheap price, its bond prices have dropped in recent days and credit ratings companies have lowered their outlook on the bank’s debt.
UBS, which had seen its stock rise the past two years on the pitch of stability, has signed up for years of a complicated integration effort and restructuring to cut at least $8 billion of costs. But the Swiss firm is betting the payoff will be worth it to add to its profitable wealth business, and it has 56 billion francs of badwill and a government guarantee on some losses to protect its downside.
The decision was a “reasonable action to give investors the option to sell back the bonds should they, having known what they know now, have chosen not to invest,” said Andrew Wong, a credit analyst at Oversea-Chinese Banking Corp.
UBS made the buyback offer to holders of its senior unsecured notes due in March 2028 and March 2032, totaling 2.75 billion euros ($3 billion), to tender the securities for cash at their respective re-offer price, citing the “exceptional corporate actions” of March 19. That was the day UBS agreed to buy its rival in a government-brokered deal aimed at containing a financial market selloff sparked by the collapse of Silicon Valley Bank earlier this month.
The bank’s senior, euro-denominated bonds rose after the offer. While shares dropped 2% on Wednesday, its 11% jump since the deal was announced is one of the biggest rises this week among European banks.
UBS’s credit risk has been jolted since concern over Credit Suisse’s fate, and the role UBS would play in it, roiled global markets. After a deal was announced over the weekend, the cost of insuring UBS’s debt for one year soared to a record. But also, the credit default swaps for the holding company rose above those for its operating company, UBS AG, by the most on record.
“UBS Group is the entity that is taking over the risk from the Credit Suisse acquisition, while its operating company should remain better protected,” Suvi Platerink Kosonen, a banking credit analyst with ING Groep NV, said on Tuesday. “From that angle it makes sense that the spreads of the group will widen and underperform against the OpCo.”
S&P Global Inc. revised its outlook on its A- rating on UBS Group to negative on execution risk from the acquisition, but maintained a stable outlook on the operating company.
- The two securities are UBS V4.625% 03/17/28 and UBS V4.75% 03/17/32
- The buyback offer opens on March 22, with the early expiration deadline on March 28 and the final expiration deadline on April 4
- “The issuer has decided to launch this exercise as a result of a prudent assessment of these recent developments and the Issuer’s long-term commitment to its credit investors,” UBS said in statement. A bank spokesman declined to comment when contacted by Bloomberg
- The bonds were priced in the public market on March 9 and were settled on March 17. There’s typically a period of gray market trading between a bond’s pricing and settlement
The two so-called bail-in bonds were priced on March 9, just as the first signs of trouble emerged at SVB Financial Group. The 2032 note was indicated at a price of 99.00 cents at 12:30pm in London on Wednesday, below its re-offer price of 99.518 cents, according to pricing compiled by Bloomberg. The 2028 debt was indicated at 99.67 cents with a re-offer price of 99.932 cents.
These securities are risky, but they’re still safer than Additional Tier 1 notes, which are the most junior bonds in a bank’s debt pile.
“It seems fair and reasonable to let investors think twice if they need to reconsider the risks, which is helpful in shoring up sentiment eventually if not immediately,” said Gary Ng, senior economist at Natixis SA.
--With assistance from Paul Cohen, Kevin Kingsbury, Wei Zhou and Lorretta Chen.
(Updates with further detail throughout, UBS decline to comment, chart.)
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