(News Bulletin 247) – The price accepted by UBS to buy out its competitor reflects a 59% discount on Friday’s Credit Suisse share price. Some creditors see the value of their debt securities reduced to zero.

It is therefore a marriage of convenience between Credit Suisse and UBS that has been recorded. Rightly because the Swiss authorities have exerted great pressure to push the country’s second bank into the arms of the first, citing the need to preserve the Swiss economy and the global financial system.

In the end, therefore, UBS agrees to buy its competitor for 3 billion Swiss francs in securities. A maneuver that was not done without breaking certain principles. “In our view, the acquisition of Credit Suisse by UBS eliminates immediate sector risks, but it also raises questions,” Jefferies said.

First, Credit Suisse shareholders will have to settle for a transaction that values ​​their shares at 0.76 Swiss francs per unit, against a closing price of 1.86 Swiss francs. That is a discount of 59%, hence the fall in the title Credit Suisse on the Zurich Stock Exchange on Monday. In the first exchanges on Monday around 9:10 a.m., Credit Suisse shares fell by 63%.

While these terms may seem unattractive to Credit Suisse holders, the choice is not theirs. The Swiss government has, in fact, issued an emergency order which allows the transaction to be carried out without their agreement being necessary.

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Creditors treated less well than shareholders

The other highlight remains the losses suffered by some creditors of Credit Suisse, that is to say the holders of the group’s AT1 bonds. These debt securities are riskier than the usual ones because they automatically turn into shares if the bank’s capital ratio falls below a certain threshold.

However, Finma, the Swiss market regulator, has decided that the exceptional support of the State, via guarantees for the operation, triggers a “complete amortization of the nominal value of all Credit Suisse AT1 loans for a volume of approximately 16 billion francs”. As Credit Suisse explained very well in its press release, this means that the value of these debt securities drops to zero.

This simply poses a risk to the entire debt market. Because the decision of the Swiss authorities simply calls into question a well-established hierarchy which wants creditors to be paid before shareholders, because they are supposed to bear less risk.

“Bondholders see the value of their securities totally wiped out, while this is not entirely the case for shareholders, although they are normally less well placed in terms of solvency”, observes Jefferies who evokes a “negative element”.

Not so accommodating for UBS

Is the operation, on the contrary, interesting for UBS? The management of the group endeavored, Sunday evening, to ensure that the terms of the operation were “attractive” and would thus create value for its shareholders.

But you will have to be patient. UBS management estimates that the takeover of the competitor will have a positive impact on its earnings per share from… 2027. In the shorter term, the impact should be negative with “the issuance of new shares (we calculate approximately 5%) and the consolidation of an entity (Credit Suisse) which is currently largely loss-making”, underlines Jefferies.

In addition, the transaction will lead to the suspension of Credit Suisse’s share buyback program.

“The acquisition of Credit Suisse by UBS looks attractive on longer-term paper and comes with a number of support measures designed to alleviate short-term uncertainty (liquidity lines, additional buffers against dips value, no competition concerns, no shareholder approval)”, Judge Royal Ban of Canada.

“Nevertheless, we believe this is unlikely to be UBS’s preferred path, but it appears to be a necessary step not only for Swiss banks, but also for the entire industry. global banking,” she adds.