UBS (UBSG.S) Chair Colm Kelleher is buying Credit Suisse (CSGN.S) because he has to, not because he wants to. The 3 billion Swiss francs ($3.2 billion) rescue deal, brokered by Swiss authorities and announced late on Sunday, is designed to shore up confidence in the country’s financial industry rather than benefit the buyer. Even so, UBS is salvaging the most value from the wreckage.
The Swiss government, central bank, and regulator FINMA concluded that a UBS takeover was better than letting Credit Suisse fail, which could have sparked a wider banking-sector panic. The job for Kelleher was how to avoid infecting UBS with its arch-rival problems.
He’s secured some handy protections. The all-share offer values Credit Suisse at 60% less than its closing share price on Friday, and at a fraction of its 45 billion Swiss franc book value at the end of last year. FINMA will also let UBS write off its target’s debt instruments, known as Additional Tier 1 (AT1) securities, boosting the combined group’s equity capital by about 16 billion Swiss francs. Meanwhile the government will cover up to 9 billion Swiss francs of losses, such as markdowns on Credit Suisse assets, past a certain threshold.
Thanks to a competition waiver, Kelleher can even keep Credit Suisse’s domestic unit, giving UBS a dominant position in local retail and corporate banking and allowing it to extract hefty cost savings. Chief Executive Ralph Hamers reckons the bank can cut about $8 billion of annual expenses by 2027. After deducting tax at 24% and capitalizing using a 10% discount rate, those savings have a net present value of about $60 billion - roughly in line with UBS’s market value before the deal.
Yet it’s a sign of Credit Suisse’s predicament that the deal is far from a home run. On a call with analysts late on Sunday, UBS executives stumbled over some of the numbers – perhaps unsurprising for a transaction negotiated over a weekend. Wealthy customers who have money stashed with both banks could move some of it to spread their risk, while UBS might have to ditch some of Credit Suisse’s dicier clients. Hamers and his team will have to rapidly shrink their new acquisition’s investment banking arm, a tricky task even in less jittery markets.
Longer term, Swiss authorities have concentrated more of the country’s financial risk in a bigger juggernaut. That means even more regulatory and political scrutiny. FINMA’s decision to write off Credit Suisse’s AT1 securities just four days after it declared the bank was meeting all its capital and liquidity requirements will only increase the alarm felt by investors in other European lenders.
A UBS takeover is preferable to the Swiss government nationalizing Credit Suisse or winding it down. And Kelleher has improved the chances of the rewards outweighing the risks. Whether it’s enough to soothe the wider financial sector is less clear.
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CONTEXT NEWS
UBS will rescue Credit Suisse in a deal worth about 3 billion Swiss francs, Swiss authorities and the two banks said on March 19.
Shareholders in Credit Suisse will get one new UBS share for every 22.48 shares they currently hold. Based on UBS’s closing price on March 17 the offer values Credit Suisse shares at 0.76 Swiss francs each, well below the last closing price of 1.86 Swiss francs.
Credit Suisse’s 16 billion Swiss francs of Additional Tier 1 securities will be written off to zero, boosting the combined group’s regulatory capital.
The Swiss government will also grant UBS a 9 billion Swiss franc guarantee against losses arising from certain assets that it will get as part of the deal. The guarantee kicks in if losses exceed a threshold, which the finance ministry did not quantify.
The Swiss National Bank will offer up to 100 billion Swiss francs of liquidity support to UBS and Credit Suisse, plus a further 100 billion Swiss francs to the smaller bank backed by a federal guarantee.
UBS estimates that the combined group could reduce its annual costs by roughly $8 billion.
Some of the world's largest central banks came together on Sunday to stop a banking crisis from spreading as Swiss authorities persuaded UBS Group AG (UBSG.S) to buy rival Credit Suisse Group AG (CSGN.S) in a historic deal.
UBS will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse and assume up to $5.4 billion in losses in a deal backed by a massive Swiss guarantee and expected to close by the end of 2023.
Soon after the announcement late on Sunday, the U.S. Federal Reserve, European Central Bank and other major central banks came out with statements to reassure markets that have been walloped by a banking crisis that started with the collapse of two regional U.S. banks earlier this month.
S&P 500 and Nasdaq futures were each up 0.4%, both giving back some earlier gains. New Zealand dipped at the open and Australian shares (.AXJO) opened with a 0.5% loss. The safe-haven dollar lost ground against the Sterling and the euro but was up versus the yen.
Pressure on UBS helped seal Sunday's deal.
"It's a historic day in Switzerland, and a day frankly, we hoped, would not come," UBS Chair Colm Kelleher told analysts on a conference call. "I would like to make it clear that while we did not initiate discussions, we believe that this transaction is financially attractive for UBS shareholders," Kelleher said.
UBS CEO Ralph Hamers said there were still many details to be worked through.
"I know that there must be still questions that we have not been able to answer," he said. "And I understand that and I even want to apologize for it."
In a global response not seen since the height of the pandemic, the Fed said it had joined with central banks in Canada, England, Japan, the EU, and Switzerland in a coordinated action to enhance market liquidity. The ECB vowed to support eurozone banks with loans if needed, adding the Swiss rescue of Credit Suisse was "instrumental" in restoring calm.
Fed Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen welcomed the announcement by the Swiss authorities. The Bank of England also praised the Swiss.
“The greater risk environment for financials leads to husbanding of capital and risk-taking, less and more conservative investing and lending, and inevitably, lower growth," said Lloyd Blankfein, former chairman and CEO of Goldman Sachs Group Inc (GS.N).
"While some banks have been hung up by poorly managed, concentrated risk, the overall banking system is extremely well capitalized and substantially more tightly regulated than in prior challenging times.”
The Swiss banking marriage follows efforts in Europe and the United States to support the sector since the collapse of U.S. lenders Silicon Valley Bank and Signature Bank.
Some investors welcomed the weekend steps but took a cautious stance.
"Provided markets don’t sniff out other lingering problems, I’d think this should be pretty positive," said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
Problems remain in the U.S. banking sector, where bank stocks remained under pressure despite a move by several large banks to deposit $30 billion into First Republic Bank (FRC.N), an institution rocked by the failures of Silicon Valley and Signature Bank.
On Sunday, First Republic saw its credit ratings downgraded deeper into junk status by S&P Global, which said the deposit infusion may not solve its liquidity problems.
U.S. bank deposits have stabilized, with outflows slowing or stopping and in some cases reversing, a U.S. official said on Sunday, adding the problems of Credit Suisse are unrelated to recent deposit runs on U.S. banks and that U.S. banks have limited exposure to Credit Suisse.
The U.S. Federal Deposit Insurance Corp (FDIC), meanwhile, is planning to relaunch the sale process for Silicon Valley Bank (SIVB.O), with the regulator seeking a potential breakup of the lender, according to people familiar with the matter.
'DECISIVE INTERVENTION'
The intervention comes after two sources told Reuters earlier on Sunday that major banks in Europe were looking to the Fed and ECB to step in with stronger signals of support to stem contagion.
The euro, the pound, and the Australian dollar all rose by around 0.4% against the greenback, indicating a degree of risk appetite in markets.
"Bank stocks should rally on the news, but it is premature to signal all-clear," said Michael Rosen, chief investment officer for Angeles Investments in California.
UBS Chair Colm Kelleher said during a press conference that it will wind down Credit Suisse's investment bank, which has thousands of employees worldwide. UBS said it expected annual cost savings of some $7 billion by 2027.
The Swiss central bank said Sunday's deal includes 100 billion Swiss francs ($108 billion) in liquidity assistance for UBS and Credit Suisse.
Credit Suisse shareholders will receive 1 UBS share for every 22.48 Credit Suisse shares held, equivalent to 0.76 Swiss francs per share for a total consideration of 3 billion francs, UBS said.
Credit Suisse shares lost a quarter of their value last week. The bank was forced to tap $54 billion in central bank funding as it tries to recover from scandals that have undermined confidence.
Under the deal with UBS, some Credit Suisse bondholders are major losers. The Swiss regulator decided that Credit Suisse bonds with a notional value of $17 billion will be valued at zero, angering some of the holders of the debt who thought they would be better protected than shareholders in a rescue deal announced on Sunday.
U.S. bank deposits have stabilized, with outflows slowing or stopping and in some cases reversing, an official said on Sunday, adding the problems of Credit Suisse are unrelated to recent deposit runs on U.S. banks.
After officials in Switzerland announced a deal for UBS to acquire Credit Suisse on Sunday, the U.S. official said that U.S. banks have limited exposure to Credit Suisse, after reducing their exposures to the No. 2 Swiss lender in recent months.
Speaking on condition of anonymity, the official said that U.S. banking regulators were in touch with Swiss counterparts on the Credit Suisse situation.
The official's comments on U.S. deposit outflows from smaller and mid-size banks to larger institutions prompted by Silicon Valley Bank's failure follow similar comments by U.S. Deputy Treasury Secretary Wally Adeyemo on Friday.
"We’ve seen that over the course of the work week, deposit flows have stabilized in regional and small banks and in some cases, have modestly reversed," he told CNBC.
Adeyemo attributed the stabilization to the systemic protection guarantees granted to uninsured depositors in Silicon Valley and Signature Bank, along with the creation of new Fed facilities that allow banks to access adequate liquidity to cover outflows.
Credit Suisse told staff its wealth assets are operationally separate from UBS for now, but once they merged clients might want to consider moving some assets to another bank if the concentration was a concern, according to an internal memo.
The memo dated Sunday, seen by Reuters, gave talking points to Credit Suisse (CSGN.S) staff for client conversations after a historic Swiss-backed acquisition of the troubled bank by UBS Group (UBSG.S).
In a package orchestrated by Swiss regulators on Sunday, UBS will pay 3 billion Swiss francs ($3.23 billion) for 167-year-old Credit Suisse and assume up to $5.4 billion in losses.
UBS will become the undisputed global leader in managing money for the wealthy through the takeover of its main rival, triggering some concerns about concentration risks for clients.
Credit Suisse also told staff to inform clients that plans for its investment banking business will be communicated in due course as details of its acquisition by UBS were still being worked out, according to an internal memo.
"We do not expect there to be any disruption to client services. We are fully focused on ensuring a smooth transition and seamless experience for our valued clients and customers," a Credit Suisse spokesperson said.
Credit Suisse is also going ahead with its annual Asia Investment Conference in Hong Kong, starting on Tuesday, the spokesperson said, in response to Reuters' request for comment on the internal memo.
The startup community is still reeling after the collapse of Silicon Valley Bank. The California-based lender was taken over by the Federal Deposit Insurance Corp. late last week after several VC firms advised companies they invest in to pull funds from the bank, leading to a bank run.
On Monday, the bank resumed business with a new CEO as Silicon Valley Bridge Bank, as it continues to look for a buyer. In addition to providing banking services for many tech startups, SVB was also the largest issuer of venture debt. According to a report by The Information, SVB had about $6.7 billion in loans to early- and mid-stage private companies in 2022. For startups, several big questions still loom: What will happen to SVB’s clients with venture debt? And what will its collapse mean for this important source of funding? Here’s what you need to know.
WHAT IS VENTURE DEBT?
Venture debt is a type of loan typically offered to early-stage, high-growth companies from specialized banks or lenders. It’s a common funding method for startup companies that are fast-growing but not yet profitable.
WHAT’S THE DIFFERENCE BETWEEN VENTURE CAPITAL AND VENTURE DEBT?
With venture capital, companies raise money from investors, commonly in exchange for a sizable portion of the equity in the company.
Venture debt on the other hand is a loan with a bank or financial institution. It’s often raised around the same time as equity funding to extend the company’s runway or can be used as a bridge to provide needed cash between equity funding rounds. Unlike traditional business loans, venture debt usually includes an “equity kicker” that gives the lender the ability to obtain shares in the company later if it gets sold or goes public.
WHAT ARE THE PROS AND CONS OF VENTURE DEBT?
One upside to using venture debt is that it gives companies working capital to grow without having to give away much equity. Taking on venture debt also allows companies to raise money without setting a new valuation. That’s particularly handy if the potential value of the company may have dropped, allowing companies to avoid a down round that would dilute the equity of founders and existing shareholders.
One big downside to venture debt is that, unlike equity financing, it needs to be repaid—with interest. Investment is also typically tied to specific business plan milestones, which can be more restrictive than with equity financing.
WHAT WILL HAPPEN TO VENTURE DEBT LOANS FROM SVB?
Silicon Valley Bridge Bank’s new CEO, Tim Mayopoulos, says the bank has resumed its deposit and lending services, even as it continues to seek a buyer. Until then, VCs and founders are in limbo over what will happen with venture debt. Private-equity firms such as Blackstone, Apollo Global Management, Carlyle Group, and KKR are reportedly looking to buy pieces of Silicon Valley Bank’s $75 billion loan portfolio.
WHAT DOES THIS MEAN FOR THE FUTURE OF VENTURE DEBT?
The use of venture debt has increased over time, recently reaching $26.5 billion in value over 2,419 deals at the end of November 2022, according to PitchBook. And SVB’s collapse could have long-lasting effects on the future of venture debt. Not only was SVB the largest venture debt lender, but it also offered attractive rates to risky startups. With SVB likely to be sold to another bank, many predict it will be harder—and more expensive—for startups to gain access to capital.
Valuations could also be affected, notes Spencer Ante, the former head of insights at Meta and author of Creative Capital: Georges Doriot and the Birth of Venture Capital, in an article for Fast Company. Already companies like Stripe are reportedly seeing lower valuations when raising new rounds of VC funding. “The declining access to the capital brought about by the demise of SVB and the chill it’s brought to the venture debt space,” he writes, “will mean VCs have more leverage to drive down valuations.”