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UBS is raising additional Tier 1 bonds for the first time since it wiped out $17 billion of risky bank debt when it acquired rival lender Credit Suisse.
The Swiss bank on Wednesday offered two new dollar-denominated AT1 bonds, split into debt payable in five years and 10 years.
The sale marks a major test of investor demand for the market, which was upended in March when UBS’ takeover of Credit Suisse led to the wipeout of $17 billion of Credit Suisse bonds.
So-called AT1 bonds, a type of bank debt designed to sustain losses during a crisis, were introduced after the 2008 financial crisis to ensure that bondholders would absorb some of the losses from a bank failure, rather than of savers or taxpayers. Credit Suisse’s write-down was controversial as bondholders argued that strict conditions in their contracts were not met, leading to the destruction.
UBS, which on Tuesday reported its first quarterly loss in six years as it was weighed down by the costs of acquiring its former rival, is under pressure to issue billions of new AT1s in coming years to make its layers of bank capital more efficient. .
UBS is marketing the five-year tranche at a yield of about 10 percent and the 10-year tranche at about 10.125 percent, to reflect the higher risk to bondholders.
The new AT1s will be issued under Swiss law and can be converted into equity instead of being written off if the bank gets into trouble. But that condition won’t come into effect until the terms are signed at UBS’s annual meeting next year.
The bank said: “We will provide additional information when the offer is complete.”
S&P gave the new UBS AT1 a BB rating, five notches lower than the bank’s A rating.
“The terms of UBS Group AG’s AT1 issues, together with the legislative framework, allow the Swiss authority to determine whether a viability event has occurred even if the capital ratio threshold has not been exceeded,” it said rating agency.
Swiss authorities’ decision to write down $17 billion of Credit Suisse’s AT1 bonds in March as a condition for the marriage to UBS has led to at least $9 billion in legal claims, including against Finma, the Swiss financial regulator, and the country. yourself.
UBS executives began sounding out investors about issuing new AT1s in September, following the release of the bank’s half-year results, the Financial Times previously reported.
Filippo Alloatti, head of financial credits at Federated Hermes, estimated that UBS had an AT1 deficit of about $11 billion and said the bond’s potential conversion to equity was “positive.”
“Following the example of Credit Suisse [collapse]investors have been pushing for change. . . away from the permanent ‘sudden death’ downgrade they experienced at Credit Suisse,” he said.
AT1s have no expiration date, but can usually be repaid after a fixed period. Banks usually refund AT1s when they are able to do so and reissue replacements.
After Credit Suisse’s AT1 holders were left with losses, the European Central Bank and the Bank of England quickly announced 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 over the summer.
On Tuesday, French lender Société Générale issued a dollar-denominated AT1, expected to be worth at least $500 million. One bond fund manager said the $7 billion demand for that deal likely prompted UBS’s decision to launch its own sale of AT1 bonds.