UBS strikes $3.25 billion bailout deal for rival Credit Suisse

UBS has agreed to buy Credit Suisse for $3.25 billion after a frenetic weekend of brokered negotiations by Swiss regulators to protect the country’s banking system and try to prevent a crisis from spreading to global markets. .

The landmark deal follows five days in which the Swiss establishment scrambled to end a deepening crisis at Credit Suisse that threatened to topple the country’s second-largest lender.

A 50 billion Swiss franc ($54 billion) emergency credit line provided by the Swiss National Bank on Wednesday failed to halt a sharp decline in the bank’s share price, which was exacerbated by the broader market turmoil caused by the sudden collapse earlier this month of California-based Silicon Valley. Bank.

“On Friday, the liquidity outflows and market volatility showed that it was no longer possible to restore market confidence, and a rapid and stabilizing solution was absolutely necessary,” Swiss President Alain Berset said during a briefing. a press conference in Bern on Sunday evening. “That solution was the takeover of Credit Suisse by UBS.”

UBS will pay around 0.76 SFr per share in its own shares, worth 3 billion SFr, against an offer of 0.25 SFr earlier on Sunday worth around 1 billion that was rejected by the Board of Directors of Credit Suisse. However, the offer remains well below Credit Suisse’s closing price of 1.86 SFr on Friday.

As part of the deal, the SNB agreed to offer a 100 billion Swiss franc liquidity line backed by a federal default guarantee to UBS, the Swiss Ministry of Finance has declared. The government also offers a loss guarantee of up to 9 billion Swiss francs, but only after UBS bears the first 5 billion francs of losses on certain portfolios of assets.

The association creates one of the largest banks in Europe. UBS has $1.1 billion in total assets on its balance sheet and Credit Suisse has $575 billion.

“It’s not a bailout. It’s a business solution,” Swiss Finance Minister Karin Keller-Sutter said. international spread.

“The United States and the United Kingdom were very grateful for this solution. . . they really feared a bankruptcy of Credit Suisse,” she added.

The takeover spells the end of the 167-year-old bank whose head office faces fierce rival UBS on Zurich’s Paradeplatz square.

It caps a calamitous few years for Credit Suisse marked by a twin crisis linked to specialist financial group Greensill Capital and family office Archegos in 2021 that led to billions of dollars in losses and seriously damaged the bank’s reputation for risk management.

Under the terms of the deal, some CHF16 billion of additional Credit Suisse Tier 1 capital bonds, designed to absorb losses when institutions run into trouble and to transfer the risk of bank failure from taxpayers to investors , are annihilated.

Credit Suisse said in its statement late Sunday that Swiss market regulator Finma had determined that the bonds would be “cancelled to zero.” Around CHF 1 billion of other capital was also written off.

UBS also agreed to remove a material adverse change clause from its original proposal, which would have allowed it to withdraw from the takeover if its credit default spreads jumped 100 basis points or more before the close of the takeover. the agreement.

The Swiss Federal Council – the executive arm of government – ​​will issue an emergency ordinance to remove regulatory and governance obstacles to the speedy closing of the transaction. Swiss parliamentarians will also eventually have to approve the process – albeit retrospectively; a vote will take place within the next six months.

Federal Reserve Chairman Jerome Powell and Janet Yellen, US Treasury Secretary, said they welcomed the move by “Swiss authorities today to support financial stability”. This was echoed by European Central Bank President Christine Lagarde, who said the rescue of Credit Suisse “was instrumental in restoring orderly market conditions and ensuring financial stability”.

The deal came after Credit Suisse chief executive Ulrich Körner was unable to draw a line under the bank’s crises during his eight-month tenure, with a restructuring plan that included the split of its investment bank and the loss of 9,000 jobs failed to convince investors.

Customers withdrew 111 billion Swiss francs from the group in the last three months of last year. Deposit outflows from Credit Suisse at the end of last week exceeded 10 billion Swiss francs a day, the Financial Times previously reported.

Shares of Credit Suisse have fallen more than 74% over the past year, leaving its market cap on Friday at just $8 billion, eclipsed by UBS’s roughly $57 billion market cap.

In 2022, UBS made $7.6 billion in profits while Credit Suisse fell to $7.9 billion, wiping out profits from the entire previous decade.

For UBS, the deal consolidates its position as the world’s largest wealth manager, with operations spanning the United States, Europe, the Middle East and Asia. The combined entity will have $5 billion in invested assets globally.

“UBS will remain rock solid,” said UBS Chairman Colm Kelleher, who will continue to lead the combined entity along with Chief Executive Ralph Hamers.

Kelleher said the Swiss division of Credit Suisse was “a great asset that we are very committed to keeping” and that it was too early to give an estimate of the job cuts in the various divisions that UBS is in the process of making. ‘acquire.

However, the chairman of UBS said he “intends to reduce Credit Suisse’s investment banking activities” so that they represent no more than 25% of the group’s risk-weighted assets. and “to align them with our conservative risk culture.”

Additionally, a proposed spin-off of the advisory and capital markets business with the First Boston brand under the leadership of Michael Klein will be reviewed and may be canceled, according to a person familiar with the plans.

Finma has given UBS the right to block any major changes at Credit Suisse until it has full control of its rival.