Central banks took collective action on Sunday to prevent a banking crisis from spreading as Swiss authorities persuaded UBS to buy Credit Suisse for about 3 billion Swiss francs ($3.23 billion) in what UBS chairman Colm Kelleher called an “emergency rescue” of the rival firm.
UBS will also assume up to $5.4 billion in losses in an all-share transaction that is backed by a massive Swiss guarantee. The transaction is not subject to shareholder approval.
UBS said the discussions for the deal were initiated jointly by the Swiss Federal Department of Finance, the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank “and the acquisition has their full support.”
Credit Suisse said 16 billion Swiss francs ($17.24 billion) of its Additional Tier 1 (AT1) debt will be written down to zero on the orders of the Swiss regulator as part of the rescue merger — a move that angered bondholders.
That means AT1 bondholders appear to be left with nothing while shareholders will receive $3.23 billion. UBS CEO Ralph Hamers told analysts the decision to write down the AT1 bonds to zero was taken by FINMA.
Meanwhile, the US Federal Reserve said it had joined with central banks in Canada, UK, Japan, the EU and Switzerland in a coordinated move to enhance market liquidity.
The Federal Reserve and the five other central banks announced the coordinated action to boost liquidity in US dollar swap arrangements.
Central banks involved in the dollar swaps will increase “the frequency of 7-day maturity operations from weekly to daily,” the Federal Reserve said in a statement that was coordinated with the other central banks.
The European Central Bank (ECB) vowed to support euro zone banks with loans if needed, adding the Swiss rescue of Credit Suisse was “instrumental” for restoring calm.
UBS said the the combination with Credit Suisse Group is expected to create a business “with more than $5 trillion in total invested assets and sustainable value opportunities.”
UBS said: “It will further strengthen UBS’s position as the leading Swiss-based global wealth manager with more than USD 3.4 trillion in invested assets on a combined basis, operating in the most attractive growth markets.
“The transaction reinforces UBS’s position as the leading universal bank in Switzerland. The combined businesses will be a leading asset manager in Europe, with invested assets of more than USD 1.5 trillion.”
UBS chairman Kelleher said: “This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue.
“We have structured a transaction which will preserve the value left in the business while limiting our downside exposure.
“Acquiring Credit Suisse’s capabilities in wealth, asset management and Swiss universal banking will augment UBS’s strategy of growing its capital-light businesses.
“The transaction will bring benefits to clients and create long-term sustainable value for our investors.”
UBS CEO Ralph Hamers said: “Bringing UBS and Credit Suisse together will build on UBS’s strengths and further enhance our ability to serve our clients globally and deepen our best-in-class capabilities.
“The combination supports our growth ambitions in the Americas and Asia while adding scale to our business in Europe, and we look forward to welcoming our new clients and colleagues across the world in the coming weeks.”
UBS added: “Under the terms of the all-share transaction, Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to CHF 0.76/share for a total consideration of CHF 3 billion.
“UBS benefits from CHF 25 billion of downside protection from the transaction to support marks, purchase price adjustments and restructuring costs, and additional 50% downside protection on non-core assets.
“Both banks have unrestricted access to the Swiss National Bank existing facilities, through which they can obtain liquidity from the SNB in accordance with the guidelines on monetary policy instruments.
“The combination of the two businesses is expected to generate annual run-rate of cost reductions of more than USD 8 billion by 2027.
“UBS Investment Bank will reinforce its global competitive position with institutional, corporate and wealth management clients through the acceleration of strategic goals in Global Banking while managing down the rest of Credit Suisse’s Investment Bank.
“The combined investment banking businesses accounts for approximately 25% of Group risk weighted assets.
“UBS anticipates that the transaction is EPS accretive by 2027 and the bank remains capitalized well above its target of 13%.
“Colm Kelleher will be Chairman and Ralph Hamers will be Group CEO of the combined entity.
“The transaction is not subject to shareholder approval.
“UBS has obtained pre-agreement from FINMA, Swiss National Bank, Swiss Federal Department of Finance and other core regulators on the timely approval of the transaction.”
The merger is expected to be consummated by end of 2023 “if possible.”
Credit Suisse said: “This move comes after the Swiss Federal Department of Finance, the Swiss National Bank and FINMA asked both companies to conclude the transaction to restore necessary confidence in the stability of the Swiss economy and banking system …
“On Sunday, Credit Suisse has been informed by FINMA that FINMA has determined that Credit Suisse’s Additional Tier 1 Capital (deriving from the issuance of Tier 1 Capital Notes) in the aggregate nominal amount of approximately CHF 16 billion will be written off to zero.
“In consideration of the unique circumstances affecting the Swiss economy as a whole, the Swiss Federal Council is issuing an emergency ordinance (Notverordnung) tailored to this particular transaction.
“Most importantly, the merger will be implemented without the otherwise necessary approval of the shareholders of UBS and Credit Suisse to enhance deal certainty.”
Credit Suisse chairman Axel Lehmann said: “Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome.
“This has been an extremely challenging time for Credit Suisse and while the team has worked tirelessly to address many significant legacy issues and execute on its new strategy, we are forced to reach a solution today that provides a durable outcome.”