UBS sounds out investors over first AT1 sale since Credit Suisse rescue

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UBS has begun sounding out investors over issuing a type of bond that was wiped out as part of its rescue of Credit Suisse six months ago — a writedown that damaged confidence in the market and triggered a wave of lawsuits.

Executives at UBS have been on an investor roadshow after reporting quarterly results last month. During the discussions, they suggested changes to the terms of future additional tier 1 securities to make them more palatable to bondholders, according to people familiar with the matter.

UBS is under pressure to replace up to $17bn of Credit Suisse AT1 bonds in the coming years to improve the efficiency of the enlarged bank’s capital structure and free up funds for shareholder returns and potential acquisitions.

But some investors remain wary after bondholders lost billions of dollars during the rescue of Credit Suisse when an emergency law brought in by the Swiss government allowed the country’s financial regulator, Finma, to protect shareholders at the expense of AT1 holders.

The decision shook up the traditional hierarchy of bank creditors and undermined confidence in AT1s, which were introduced after the financial crisis as regulators tried to shift risk away from depositors and imposed greater capital requirements on banks in case of failure.

“UBS are working frantically in the background to sort this out,” said a bond fund manager who recently met the bank’s representatives. “They need to give investors confidence that the capital structure won’t be inverted and the rules won’t be changed at the eleventh hour again.”

One option under consideration is replacing UBS’s AT1 bonds, which are designed to be written down in the event the bank runs into trouble, with versions of the security that would be converted into equity, according to two people involved in the investor discussions.

“Equity conversion is probably better and there is more demand if you do it like that,” said another bond investor. “But we are not naive and don’t think it changes the risk.”

AT1s have no maturity date but can typically be called every five years by the issuer. Banks usually call AT1s when they are able to and reissue replacements. UBS has a S$700mn ($510mn) bond that is callable at the end of November and $2.5bn bond that is callable at the end of January.

When UBS in August reported $29bn in profit, a record quarterly figure for a bank, due to an accounting gain from the Credit Suisse takeover, chief executive Sergio Ermotti said it was weighing up when to re-enter the AT1 market.

“We are watching the market carefully,” he said. “We will assess the timing and the need of tapping the markets when appropriate.”

After Credit Suisse’s AT1 holders were left with losses, the European Central Bank and Bank of England were quick to announce that 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.

While AT1 borrowing has picked up pace since Credit Suisse’s AT1s were wiped out, issuance is slower this year than last, according to data from LSEG.

But given Finma’s unprecedented decision, investors said UBS would be under pressure to assuage concerns over the risks.

“They will have to make their bonds as investor-friendly as possible,” said a bond manager involved in the UBS roadshow. “They will have to pay a premium, too.”

“I think they’ll be able to get a deal done,” said another investor. “UBS is obviously an absolutely massive bank now, probably too big to fail and too big to save for the Swiss economy now, considering its size.

“However, I do think there will be some investors that will be scarred by March and will say: ‘No, actually, those kinds of actions are not where I want to place my money’,” the investor added.

UBS declined to comment.

A group of international bond investors who lost billions of dollars on the collapse of Credit Suisse is drawing up plans to sue the nation of Switzerland in the US courts, the Financial Times reported on Friday.