On Sunday, 19 March, Swiss regulators persuaded financial giant UBS to "take on board" its rival Credit Suisse, which had been suffering from a loss of investor and depositor confidence. With the authorities' permission, UBS will urgently buy out Credit Suisse shares at half price ($3.25 billion) and will be able to zero out the $17.3 billion debt mountain.
What are the terms of the deal? Credit Suisse's press release says that every 22.48 of its shares will be exchanged for one share of UBS. This ratio was calculated on the basis that the entire Credit Suisse was valued at CHF 3 billion ($3.2 billion) as part of the deal. This is less than half of Credit Suisse's market value on Friday – CHF 7.4 billion. And it is seven times less than the bank was worth two years ago (23 billion francs).
What is unusual about it? The extraordinary thing is that the transaction will be carried out without the approval of the shareholders of both banks. The Swiss authorities have changed the law to speed up the takeover process from several months to a few days and eliminate uncertainty about the acquisition of Credit Suisse.
Why was it necessary to resort to an emergency sale and purchase? Investors and clients began to lose confidence in Credit Suisse after it ended 2022 with a loss of $7.9 billion, its worst result since 2008. Concerns about the bank's health began to escalate into panic after Silicon Valley Bank suddenly went bankrupt and Signature Bank was closed in the US due to a run on depositors.
"Shares in the 167-year-old bank fell 25% over the week, money poured from investment funds it manages and at one point account holders were withdrawing deposits of more than $10 billion per day, the Financial Times reported. An emergency loan of nearly $54 billion from the Swiss National Bank failed to stop the bleeding," CNN describes the situation.
What was the reasoning behind the buyer's choice? UBS has demonstrated stability against the backdrop of competitors' problems. Over the past two years, its shares have risen by 15%, and the bank earned $7.6 billion in profit in 2022. On Friday, 17 March, its market value was $65 billion.
Swiss President Alain Berset said that "the takeover of Credit Suisse by UBS is the best solution" in the current situation. His position was echoed by the country's Finance Minister Karin Keller-Sutter, who expressed regret that Credit Suisse was unable to solve its problems on its own.
The Swiss authorities assure that the deal will benefit the country. UBS's assets will increase by 52% to $1.7 trillion after the acquisition of Credit Suisse. The combined company will gain significant economies of scale and strengthen its position in the top twenty most important banks in the global financial system.
What are the risks? Critics see the deal as a blow to Switzerland's reputation. The authorities risk irritating foreign investors, losing thousands of jobs and getting a financial monster with distressed assets that are twice the size of the country's $841 billion economy.
The Swiss National Bank has pledged to support UBS and Credit Suisse with loans of up to CHF 100 billion (USD 108 billion). This is a huge amount for a relatively small country, and in the event of problems, it could be a heavy burden on taxpayers.
Who will suffer the most? So far, the biggest loser from the Swiss bank merger looks to be the National Bank of Saudi Arabia. Fifteen weeks ago, it completed the acquisition of the largest stake in Credit Suisse, and after exchanging it for UBS shares, it will lose more than $1.1 billion.
The Qatar Sovereign Wealth Fund, which has been actively investing not only in the troubled bank's shares but also in Additional Tier 1 bonds since 2008, may also be the main victim. Credit Suisse has issued such securities for 16 billion francs ($17.3 billion). According to Reuters, their value could be completely zeroed out.
"It's stunning and beyond comprehension to think how they could have reversed the hierarchy of AT1 holders and shareholders," Reuters quoted Jerome Legras, Head of Research at Axiom Alternative Investments, an investment company that holds Credit Suisse's AT1 bonds, as saying.
Thousands of employees of the acquired bank will also be among those affected by the merger. Credit Suisse employs more than 50,000 people, including 17,000 in Switzerland. According to Bloomberg, in an attempt to save itself, the bank planned to axe 9,000 jobs. After the merger with UBS, this number may increase many times over, as the combined company ended up with significant duplication.