Credit Suisse’s decision to write off $17bn of additional tier one (AT1) bonds could have a significant impact on the European market. The write-off has been described by Patrik Kauffmann, a portfolio manager at Aquila Asset Management, as a “total blow to the AT1 market,” which is estimated to be worth $275bn. This development comes after Swiss rival UBS acquired Credit Suisse for $3.2bn and agreed to absorb losses of up to $5.4bn. As part of the deal, equity shareholders of Credit Suisse will receive one UBS share for every 22.48 Credit Suisse shares held.
UBS is expected to gain a financial cushion of $34.8bn from the negative goodwill of its purchase of Credit Suisse for a relatively small fraction of its book value. However, the integration of the two banks could take between three and four years and may cost as much as $28bn. Credit Suisse warned that it expects to see a “substantial” pre-tax loss due to restructuring charges, the adverse revenue impact, and funding costs of exiting non-core businesses in its investment bank unit, and overall in the second quarter and full year of 2023.
The deal between the two banks is worth $28bn, and it is the first rescue of a global bank since the 2008 financial crisis. The creation of a wealth manager with over $5tn in invested assets and more than 120,000 global employees will result from the acquisition, set to be completed next month. However, UBS has warned that both Credit Suisse and its investment division are expected to show substantial pre-tax losses in Q2 and for the remainder of the year.
UBS had to impose some restrictions on Credit Suisse while their merger/takeover is being finalized due to risk control failures. Credit Suisse is not authorized to grant a new credit line exceeding CHF 100m ($113m) to investment-grade borrowers, while a new credit line to non-investment borrowers cannot be granted that exceeds CHF 50m. Credit Suisse is also unable to include capital expenses exceeding CHF 10m and cannot enter into specified contracts for more than CHF 3m per year.
The report from Credit Suisse revealed that CHF61.2bn ($68.6bn) was withdrawn from the bank in the first quarter of this year, signaling significant net asset outflows from the bank in the second half of March. It is worth noting that at that time, Credit Suisse was undergoing an emergency takeover by UBS.
The bottom line is that the write-off of these AT1 bonds by Credit Suisse is a significant development that could affect the European market. While UBS is set to gain a financial cushion of $34.8bn from the negative goodwill of the purchase, it is expected that the integration process could take between three and four years and may cost as much as $28bn. Restrictions have been imposed on Credit Suisse while their merger/takeover is being finalized due to risk control failures, and Credit Suisse is expected to show substantial pre-tax losses in Q2 and for the remainder of the year. The impact of this development is worth monitoring closely in the coming months.
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