UBS agrees $3.25bn rescue deal for rival Credit Suisse

After a chaotic weekend of negotiations, UBS agreed to purchase Credit Suisse for $3.25bn. This was in response to a Swiss regulator’s efforts to protect the country’s banking system as well as prevent a crisis from spreading to other markets.

This historic deal comes after five days of intense racing by the Swiss establishment to end the crisis at Credit Suisse, which threatened to overthrow the country’s second largest lender.

A Swiss National Bank emergency credit line of SFr50bn ($54bn), provided Wednesday by the bank, failed to stop a sharp decline in the share price. This was exacerbated earlier this month by market turmoil caused by the sudden collapse of Silicon Valley Bank .

Alain Berset, Swiss president, stated that Friday’s liquidity outflows and volatility in the market showed it was impossible to restore market confidence. He also said that a quick and stabilizing solution was necessary. “This was achieved by the acquisition of Credit Suisse (UBS).

UBS will pay SFr0.76 per share for its stock. This is up from a Sunday bid of SFr0.25 that was rejected by Credit Suisse’s board. The offer is still far below Credit Suisse’s Friday closing price of SFr1.86.

The deal also includes the SNB offering a SFr100bn liquidity loan backed by a federal default guarantee for UBS, according to the Swiss finance ministry. The government also offers a loss guarantee up to SFr9bn after UBS has borne certain portfolio losses of assets in excess of SFr5bn.

This combination makes UBS one of Europe’s largest banks. UBS’s total assets are $1.1tn, while Credit Suisse’s balance sheet is $575bn.

“This is not a bailout. “This is a commercial solution,” stated Karin Keller-Sutter, Swiss finance minister. “The bankruptcy would have caused enormous collateral damage to the Swiss financial markets and a risk of contagion international.

“The UK and the USA were extremely grateful for this solution. . . They really feared the bankruptcy of Credit Suisse,” she said.

The bank’s 167-year-old headquarters will be facing its fierce rival UBS on Zurich’s Paradeplatz square.

This marks the end of a difficult few years at Credit Suisse. They were marked by two crises, one linked to specialist financial group Greensill Capital, and one linked to family office Archegos 2021. These losses resulted in billions and severely damaged Credit Suisse’s reputation for risk-management.

The deal will wipe out some SFr16bn worth of Credit Suisse’s Additional Tier 1-capital bonds. These bonds are used to absorb losses in the event of institutions running into difficulties and transfer risk to investors.

Credit Suisse stated in a statement that Finma, the Swiss market regulator, had decided that the bonds would be “written off to zero”. Other capital, worth around SFr1bn, was also written off.

UBS also agreed that they would remove the material adverse change clause in their original proposal. This would have allowed them the option to rescind the takeover if credit default spreads rose by more than 100 basis points before the deal closes.

The Swiss federal council, the executive arm of government, will issue an emergency order to remove regulatory and governance obstacles to facilitate the fast closing of the transaction. The process will eventually be approved by the Swiss parliamentarians, but retrospectively. A vote will take place within six months.

Janet Yellen (US Treasury secretary) and Jerome Powell, Federal Reserve chair, expressed their appreciation for the “Swiss authorities’ decision to support financial stability. Christine Lagarde of the European Central Bank said that Credit Suisse’s rescue was crucial for restoring orderly markets and ensuring financial stability.

After Credit Suisse chief executive Ulrich Korner was unable to draw a line beneath the bank’s crisis during his eight-month tenure. A restructuring plan that included spinoff its investment bank and the elimination of 9,000 jobs failed to convince investors.

In the last three months of the year, customers drew SFr111bn out of the group. Credit Suisse’s late last week outflows of deposits topped SFr10bn per day.

Credit Suisse shares are down by more than 74% over the past 12 months, leaving its market capitalisation at $8bn on Friday, dwarfed only by UBS’s market cap of roughly $57bn.

UBS made $7.6 billion in profit in 2022 while Credit Suisse suffered a $7.9bn loss. This effectively wipes out the entire earnings history of the previous decade.

UBS’s deal consolidates its position as the largest wealth manager in the world, with operations across the US, Europe and the Middle East. Globally, the combined entity will have $5tn in invested assets.

Colm Kelleher (chair of UBS) said that UBS will be rock-solid and will continue to lead the entity together with Ralph Hamers, chief executive.

Kelleher stated that Credit Suisse’s Swiss Division was “a fine asset” that Credit Suisse is determined to keep. It was also too early to estimate the impact of job cuts in all divisions UBS is buying.

The UBS chair stated that Credit Suisse’s Investment Banking business will be “distributed” to less than 25% of the group’s risk-weighted assets and aligned with its conservative risk culture.

According to someone familiar with the plans, the plan to spin-off the advisory and capital market operations under the First Boston brand leadership of Michael Klein will be reviewed and could be cancelled.

Finma gave UBS the authority to stop any material changes at Credit Suisse, until it has taken full control of its competitor.