UBS buys crisis-stricken Credit Suisse with a rushed, $3.25-billion takeover deal

Open this photo in gallery:

UBS Group UBS-N is buying troubled rival Credit Suisse Group CSGKF in an all-share deal worth US$3.25-billion, creating a global wealth manager with US$5-trillion of invested assets and ending a century and a half of independence for what was once one of the world’s mightiest investment banks and traders.

The fast-track merger, announced Sunday evening, reflected the desperation of governments and regulators for an agreement before the markets opened on Monday for fear that Credit Suisse’s alarmingly fast deterioration could trigger a crushing selloff.

Financial markets are suddenly gripped by the spectre of bank failures that, if they continue, could dry up lending, cripple weak businesses and help push European and North American economies into recession. Some investors fear a repeat of the 2007-2008 financial crisis, which saw hundreds of banks and investment banks, big and small, outright collapse or saved through government bailouts.

Other investors are more optimistic, noting that banks are better capitalized and regulated than they were 15 years ago, making them less prone to failure. Still, the implosion of Silicon Valley Bank earlier this month and the near meltdown of Credit Suisse in the past week triggered banking jitters worldwide and sent bank equities tumbling.

At a news conference Sunday night in Bern, the Swiss National Bank, the country’s central bank, said it would grant UBS, Switzerland’s largest bank, a liquidity assistance loan of up to 100 billion Swiss francs (US$108-billion) to ease the deal.

“With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,” the central bank said in a statement.

The Swiss federal government is granting UBS a guarantee of 9 billion Swiss francs to assume potential losses arising from Credit Suisse’s assets, but only after UBS has borne the first 5 billion of losses on certain asset portfolios. “It was indispensable that we acted quickly and find a solution as quickly as possible,” Swiss National Bank president Thomas Jordan said at the news conference.

Leaders from the central bank, banking regulator and government underscored at the news conference how serious they believed the consequences from a collapse of Credit Suisse could have been for the stability of the global financial sector.

Finance Minister Karin Keller-Sutter, seated next to Swiss President Alain Berset, also said international counterparts in the United States and Britain were grateful for the outcome, showing the pressure Switzerland felt to find a solution.

In a joint statement, U.S. Treasury Secretary Janet Yellen and Federal Reserve Board Chair Jerome Powell said: “We welcome the announcements by the Swiss authorities today to support financial stability,” and emphasized the resilience of the U.S. financial system.

In a further global response of a kind not seen since the early months of the COVID-19 pandemic, five major central banks – the Bank of Canada, Federal Reserve, European Central Bank, Bank of Japan and Swiss National Bank – announced a co-ordinated action to enhance market liquidity. Starting Monday, the central banks will move from weekly to daily auctions of U.S. dollars through standing swap line arrangements until the end of April.

In joint statements, the central banks said the swap lines act as “an important liquidity backstop to ease strains in global funding markets” that could otherwise constrain the supply of credit to households and businesses.

Opinion: No, the failure of three U.S. banks and a crisis at Credit Suisse is not 2008 again

On the UBS deal, Swiss law will quickly change to allow the merger to bypass a shareholder vote, eliminating the customary six-week consultation period. Ms. Keller-Sutter said that the “emergency law is temporary” and was needed to ensure a rapid takeover.

The all-share deal, first reported by the Financial Times earlier on Sunday, will essentially wipe out Credit Suisse shareholders. UBS is to pay 1 share in UBS for 22.48 shares in Credit Suisse, the equivalent of 0.76 Swiss francs for each share. That’s up from the opening offer of only 0.25 a share. Friday’s closing valued the bank at a mere 7.4 billion Swiss francs and the UBS takeover reduces that value by about 60 per cent.

The takeover plans came fast. Only last week, Credit Suisse’s executive team, led by CEO Ulrich Koerner, a former UBS senior executive, was promoting the bank’s restructuring, not its imminent sale.

But the crisis of confidence accelerated in the very same week, when California’s Silicon Valley Bank imploded virtually overnight, shattering the nerves of bank equity and bond investors everywhere. At about the same time, Saudi National Bank chairman Ammar Alkhudairy said his bank would “absolutely not” provide extra capital to Credit Suisse. The Saudi bank had bought 10 per cent of Credit Suisse last year and saw the value of that investment steadily deteriorate.

Credit Suisse said UBS will be the surviving entity, suggesting that the storied Credit Suisse name will eventually vanish. Credit Suisse, which today has 50,000 employees, was instrumental in putting Switzerland on the global investment banking map. It was a powerhouse in the frenzied takeover market in the 1980s and made it through the 2007-2008 financial crisis largely intact – it required no bailout – only to see a series of scandals and slow restructuring efforts reverse its fortunes.

Credit Suisse had been in rapid decline for months, and the outflow of clients and deposits reached critical levels in recent days. Last Wednesday, the Swiss central bank attempted to prop up Credit Suisse by providing it with a credit line worth US$54-billion while it sought a buyer. The emergency injection ultimately failed to reverse the outflow or the share-price collapse.

The frenzied takeover of Credit Suisse leaves the fate of some of its businesses in doubt. UBS was mostly attracted to Credit Suisse’s profitable Swiss banking unit and the company’s global wealth- and asset-management businesses. It reportedly had little desire to own Credit Suisse’s investment-banking division, which is dominated by CS First Boston (CSFB) in the United States.

CSFB’s future is now uncertain, and at Sunday’s news conference, UBS chairman Colm Kelleher said his bank plans to significantly “downsize” Credit Suisse’s investment banking business in keeping with UBS’s more conservative approach.

Last year, Credit Suisse made plans to hive off the once-famous Wall Street business, which was a formidable mergers and acquisitions powerhouse under Bruce Wasserstein and Joe Perella in the 1980s, and sell it through an initial public offering by 2025. There are now no assurances that spinoff can proceed. Credit Suisse’s investment-banking trading arms could be wound down or broken into pieces and sold off under UBS ownership.

The company’s string of scandals, which propelled its fall from grace, has cost it a fortune in lawsuits and settlements. Credit Suisse had 1.2 billion Swiss francs (US$1.3-billion) in legal provisions at the end of 2022 and said it was reasonable to assume another 1.2 billion would be added to the bill.

Credit Suisse has been in decline since 2007, the year when its market value peaked at more than 100 billion Swiss francs. With First Boston, which was bought in 1988, at its side, the company was a force in banking, investment banking and trading. The international Financial Stability Board labels both Credit Suisse and UBS as two of the 30 “systemically important” global financial institutions, suggesting that the failure of any one of them could trigger a financial crisis.

Senior executives promised restructurings to refocus and shrink the bank, but were slow to do so as the costly, reputation-hobbling scandals piled up.

Among them was the U.S. tax fraud conspiracy, which saw the bank plead guilty in 2014 to having helped American clients file false tax returns. Credit Suisse paid US$2.6-billion in fines and restitution. A year earlier, Credit Suisse was fined in Europe for its role in manipulating foreign-exchange rates.

More recently, Credit Suisse’s role in the Mozambique “tuna bonds” scandal battered its image globally. Credit Suisse made US$1.3-billion of loans to Mozambique, partly to develop its tuna fishing industry. Some of the funds were unaccounted for and a Mozambique contractor was found to have arranged US$50-million in kickbacks to Credit Suisse bankers.

With confidence evaporating in Credit Suisse in recent months, counterparties began to restrict or eliminate trades with the bank. Clients yanked more than US$100-billion of assets in the final quarter of 2022 as concerns about the long-term viability of the bank intensified.

The outflow continued even after it raised 4 billion Swiss francs in new capital from shareholders in December. Last week’s emergency loans from the Swiss National Bank also failed to stop the outflow and Credit Suisse’s credit default swaps, a form of bond insurance, remained at distress pricing levels.

With reports from James Bradshaw and Reuters