Swiss financial services group Credit Suisse was restructured which put further pressure on bank stocks globally, with the unusual way it was restructured also bringing age-old investment rules into focus which shone a light on hybrid securities locally.
What happened?
UBS took over (were effectively handed) Credit Suisse in an emergency rescue as a crisis of confidence hit the company following their failure to find assistance from large investors / shareholders and stem large daily withdrawals from their bank after it became apparent that the Swiss central bank’s funding line wouldn’t last very long.
Why did it happen?
Credit Suisse Group never really fully recovered from the GFC, caught up in a revolving door of scandals within their investment banking arm which soured what would otherwise be two pretty good divisions in banking and funds management. The emergency rescue aimed to calm anxiety about contagion across the global financial sector as bank collapses in the US made deposit holders nervous in other jurisdictions.
How did it happen?
Under the deal, UBS agreed (was encouraged) to buy Credit Suisse for 76c Swiss franc (CHF) a share in its own stock versus CHF1.86 on Friday and CHF7.31 a year ago. The merger (or takeover) was sealed without a shareholder vote, highly unusual for company that hasn’t collapsed, and only allowed after the Swiss government swiftly moved to pass new laws over the weekend.
Other details of the deal include:
Swiss central bank providing a liquidity assistance loan of up to CHF100 billion.
UBS to have unrestricted access to the central bank’s existing liquidity facilities.
Swiss government to provide UBS with a CHF 9 billion default guarantee to assume potential losses from some of the assets UBS will acquire.
All Credit Suisse debt transferred to UBS, so bond holders in Credit Suisse made good.
Equity holders weren’t wiped out, in a highly unusual move, which sees them now get equity in UBS (ie. participate in any equity upside).
Shockingly, bank capital securities referred to as “Additional Tier 1 (AT1)” of CHF16 billion were totally wiped out.
Has the rescue plan worked?
It’s too early to tell just yet. But based on initial and subsequent market movements it appears to have done the trick in calming investment markets and deposit holders.
What are the implications of the rescue plan for Australian investors?
Due to the lack of banking competition in Australia which encourages / enables fairly onerous regulatory requirements for our banks, Australian banks are extremely well capitalised and are currently not experiencing the same problems as those being experienced offshore. In saying that, the bank collapses offshore are largely a function of lack of confidence from deposit holders (with a sprinkling of company incompetence), not bad debts like we saw in the GFC, so local regulators, the RBA, and the government will need to remain vigilant.
The critical aspect of the Credit Suisse rescue plan is that the Swiss government / regulators effectively changed the rules on the run without any consultation. That is, they have effectively broken the age-old rules that govern the “corporate stack” – ie. in the event of a wind-up, which investors take a hit first in order to cushion those investors further up the corporate stack, where senior secured creditors sit. By saving equity holders and wiping out AT1 security holders (which sit above equity holders), they have brought into question the rules and protections which investors afforded to AT1 securities, akin to AT1 hybrid securities in Australia.
This has resulted in or will result in:
The effective inability of any Swiss bank to ever issue an AT1 security again.
The European central bank and the Bank of England moved swiftly to provide comfort that the rules governing the corporate stack remain intact (RBA yet to comment publicly).
The listed AT1 market locally saw some material selling early in the week due to investor concerns, with many now trading below their $100 par value.
The last point here is key for holders of hybrid securities locally given the market repricing on the back of regulatory risks offshore and also some market repricing of the floating bank bill swap rate (forms part of the yield on a hybrid security) which has fallen over the last week or so. It’s important to note that local AT1 securities do have some structural differences to their offshore counterparts, namely that our AT1s con offshore ones often don’t.
We remain watchful of further developments.
This update was written by Chris Lioutas (M App Fin, B App Fin/B Com - Acctg). Chris is on the board of Peer Wealth X Futuro Investment Committee.
Disclaimer: The material and contents provided in this article contains general information and does not take into account your personal objectives, financial situation or needs. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, please contact Peer Wealth on (02) 8014 7608.
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