Tag Archives: UBS

UBS To Buy CS For $3 Billion As AT1 Bonds Get Wiped Out In Record Bail-In; Swiss Govt Grants CHF9BN Guarantee; SNB Offers $100 Billion Liquidity Backstop, by Tyler Durden

All the gory details. Credit Suisse is”lucky” its failure is at the leading edge. Long before this is over all the king’s horses and all the king’s men won’t be able to put busted banks back together again. From Tyler Durden at zerohedge.com:

Update (1500ET): We finally have a deal, and what was at first a CHF1 BN acquisition priceof Credit Suisse by UBS, which then rose to CHF 2 BN, has now cranked up one final time to CHF 3BN (US$3.25 billion), or 0.76 per share, specifically shareholders of Credit Suisse will receive 1 share in UBS for 22.48 shares in Credit Suisse. As part of the deal, the Swiss National Bank is offering a 100 billion-franc liquidity assistance to UBS while the government is granting a 9 billion-franc guarantee for potential losses from assets UBS is taking over, i.e., this is a taxpayer-backed bailout.

More importantly, however, the bank’s entire AT1 tranche – some CHF16BN of Additioanal Tier 1 (AT1) bonds, a $275BN market – will be bailed in and written down to zero, to wit: “FINMA has determined that Credit Suisse’s Additional Tier 1 Capital (deriving from the issuance of Tier 1 Capital Notes) in the aggregate nominal amount of approximately CHF 16 billion will be written off to zero.

This wipe out, pardon, bail-in is the biggest loss yet for Europe’s $275 billion AT1 market, far eclipsing the approximately €1.35 billion loss suffered by junior bondholders of Spanish lender Banco Popular SA back in 2017, when it was absorbed by Banco Santander SA to avoid a collapse.

AT1 bonds were introduced in Europe after the global financial crisis to serve as shock absorbers when banks start to fail. They are designed to impose permanent losses on bondholders or be converted into equity if a bank’s capital ratios fall below a predetermined level, effectively propping up its balance sheet and allowing it to stay in business.

As Bloomberg notes, investors had been concerned that a so-called bail-in would result in the AT1s being written down, while senior debt issued by the holding company, Credit Suisse would be converted into equity for the bank.

In retrospect, they were right to be worried… meanwhile equityholders get CHF3 billion; we are confident Swiss pensions will be delighted they are getting a doughnut while the Saudis get a not immaterial recovery.

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UBS’s Puerto Rico Bond Funds Implode, “Collateral Value” Drops to Zero, Investors Screwed, by Wolf Richter

Here are phrases you will be hearing a lot of in the next few months: first, second, third, fourth, fifth, etc. order effects. Case in point: UBS sells bond funds that buy Puerto Rico municipal bonds, some of which UBS underwrote. Puerto Rico is deep in the hole and probably won’t make payment on some of the bonds. That’s the first order effect. Some of UBS’s customers have borrowed money using their bond funds as collateral. That’s the second order effect. UBS has just told its customer that it has marked their collateral down to zero, which means they can no longer borrow against those bond funds. The customers have to either come up with more money or sell their bond funds, almost certainly at a loss. That’s a third order effect. The diminution in their net worth may reduce their consumption, saving, investment, or, in extreme cases, their ability to pay their creditors, fourth order effects. And that’s how defaults unravel daisy chains of debt. From Wolf Richter, at wolfstreet.com:

“We believe that the probability of default is approaching 100 percent, and that losses given default are substantial,” Moody’s wrote on Wednesday about Puerto Rico’s $72 billion in bonds that were stuffed into numerous conservative-sounding bond funds spread across America’s retirement portfolios.

“Bondholder recoveries will be lowest on securities lacking explicit contractual or other legal protections,” the report went on, according to Bloomberg. About $26 billion in bonds fall into this category, issued by entities such as the Government Development Bank, Highways and Transportation Authority, Infrastructure Finance Authority, and Municipal Finance Authority. Investors in these bonds might recover only 35 cents on the dollar.

Recovery rates for bonds with stronger investor protections, such as general obligation bonds, would likely range from 65% to 80%, Moody’s said.

But those recovery rates, as dire as they seem, only apply if you own the bonds outright. If you own those bonds in a bond fund, the scenario may look much, much worse, according to what UBS just did.

Turns out, some of these bonds were underwritten by UBS and stuffed with other Puerto Rico bonds into its own Puerto Rico closed-end bond funds and sold to its own unsuspecting clients. These funds aren’t traded; UBS sets the value.

And UBS, despite the well-known problems Puerto Rico has been having for years, wasn’t shy about loading up its clients up with these bonds, apparently, according to Reuters:

Many UBS brokers had misgivings about the funds even as UBS’ Puerto Rico chairman was pushing them to sell the bonds, according to a voice recording, reported by Reuters in February.

And then there was leverage, as recommended by UBS brokers because UBS profits even more, not only in selling the bond funds but also in lending the money:

Many of those investors bought even more fund shares with money they borrowed through credit lines from another UBS unit, after several UBS brokers may have improperly advised them to do so, according to a $5.2 million settlement between UBS and Puerto Rico’s financial regulator in 2014.

Since the collapse of Puerto Rico bonds, the funds have become “legal headaches for the firm,” as Reuters put it, with the FBI “investigating allegations about UBS’ sales practices that touted the funds’ high yields and tax advantages.”

OK, looks like these funds have become a sordid business. But as unlikely as it may seem, they just now got even more sordid:

UBS sent out a letter to its clients on July 13, and at least one of those incensed recipients must have leaked a copy to Reuters. In this letter, UBS said that it “will also reduce to zero the collateral value assigned to all Puerto Rico closed-end funds shares.”

To zero!

Clients were warned that they can no longer use these funds as collateral for loans, even those loans they used to buy these funds with in the first place.

To continue reading: UBS’s Puerto Rico Bond Funds Implode