UBS launches first AT1 bonds since Credit Suisse takeover

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UBS is raising additional tier 1 bonds for the first time since $17bn worth of the risky bank debt was wiped out when it took over rival lender Credit Suisse.

The Swiss bank on Wednesday offered two new dollar-denominated AT1 bonds, split between debt that can be redeemed in five years and 10 years.

The sale marks a big test of investor demand for the market, which was shaken in March when the takeover of Credit Suisse by UBS resulted in $17bn of Credit Suisse bonds being wiped out.

So-called AT1 bonds, a type of bank debt designed to take losses during a crisis, were introduced after the 2008 financial crisis to ensure that bondholders would take some of the losses from a bank failure, rather than depositors or taxpayers. The Credit Suisse writedown was controversial because bondholders argued that strict conditions in their contracts, which triggered the wipeout, were not met.

UBS, which reported its first quarterly loss in six years on Tuesday as it was weighed down by the costs of taking over its former rival, is under pressure to issue billions of new AT1s in the coming years to make its layers of bank capital more efficient.

UBS is marketing the five-year tranche at about 10 per cent yield and the 10-year at about 10.125 per cent, to reflect the higher risk to bondholders.

The new AT1s will be issued under Swiss law and can be converted to equity rather than being written off should the bank run into difficulties. But that condition will be activated only after the terms are signed off at UBS’s annual meeting next year.

The bank said: “We will provide additional information when the offering is complete.”

S&P gave the new UBS AT1 a BB rating, five notches below its A- credit rating on the bank.

“The terms and conditions of UBS Group AG’s AT1 issues together with the legislative framework give the Swiss authority the capability to determine whether a viability event has occurred, even if the capital ratio threshold has not been breached,” said the rating agency.

Swiss authorities’ decision to write down $17bn of Credit Suisse’s AT1 bonds in March, as a condition of its shotgun marriage to UBS, has led to at least $9bn of legal claims, including ones against Finma, Switzerland’s financial regulator, and the country itself.

UBS executives began sounding out investors over issuing new AT1s in September following the publication of the bank’s mid-year results, the Financial Times previously reported.

Filippo Alloatti, head of financials credit at Federated Hermes, estimated UBS had an AT1 shortfall of about $11bn and said the bond’s potential conversion to equity was “positive”.

“Following the Credit Suisse [collapse], investors have been pushing for a change . . . away from the ‘sudden death’ permanent writedown they experienced with Credit Suisse,” he said. 

AT1s have no maturity date but can typically be repaid after a fixed time period. Banks usually repay AT1s when they are able to and reissue replacements.

After Credit Suisse’s AT1 holders were left with losses, the European Central Bank and Bank of England were quick to announce they would not have wiped out the bank’s bonds as Finma did.

As a result, eurozone banks such as BNP Paribas, BBVA and Bank of Cyprus found it easy to find buyers when they re-entered the AT1 market during the summer.

On Tuesday, French lender Société Générale issued a dollar-denominated AT1 that was expected to amount to at least $500mn. One bond fund manager said that the $7bn of demand for that deal probably spurred UBS’s decision to launch its own AT1 bond sale.