UBS Initiates Sale of Additional Tier 1 Bonds Following Credit Suisse Controversy

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In a strategic move, UBS has ventured into the market to sell Additional Tier 1 (AT1) bonds, marking a significant development since its involvement in the Credit Suisse emergency rescue. The Swiss banking giant is actively marketing two tranches of U.S. dollar AT1 bonds, featuring a non-call five-year offering with an enticing 10% yield and a non-call 10-year offering of approximately 10.125%, as reported by LSEG news service IFR. Non-call bonds, defined by payouts solely at maturity, are at the centre of UBS’s latest financial manoeuvre.

While UBS has confirmed its foray into additional tier 1 securities, specific contract details remain undisclosed. The bank assured CNBC that comprehensive information about the offering would be provided upon its completion.

The backdrop to this move involves the contentious rescue of Credit Suisse, which witnessed the obliteration of $17 billion in AT1 bonds. This incident, orchestrated by Swiss authorities in March, triggered discontent among bondholders and has since posed legal challenges for the Swiss government and regulators.

AT1 bonds, characterized by their relatively risky nature as junior debt, are typically held by institutional investors. Introduced in the aftermath of the 2008 financial crisis, these bonds serve regulatory objectives by diverting risk from taxpayers and fortifying financial institutions’ capital to mitigate potential future crises.

Fitch, in its latest assessment, assigned a “BBB” rating to UBS’s new AT1 notes. This rating stands four notches below UBS Group’s overall viability rating of “A.” Fitch attributed two notches to “loss severity given the notes’ deep subordination” and an additional two to “incremental non-performance risk.”

Notably, UBS’s new AT1 notes incorporate a permanent write-down mechanism at the point of issue. However, subject to approval at UBS Group AG’s 2024 Annual General Meeting, this mechanism will undergo transformation into an equity conversion mechanism, aligning the terms with prevailing standards in other European markets. The conversion feature proposes that, upon approval, the notes would convert into a predetermined volume of share capital of UBS Group AG in instances where the common equity Tier 1 (CET1) ratio falls below a 7% trigger or if the Swiss Financial Market Supervisory Authority (FINMA) declares a viability event. This move underscores UBS’s strategic financial manoeuvring and reflects its commitment to adapting to regulatory dynamics and market conditions.