Having declined the initial USD 1 billion offer, the Credit Suisse-UBS merger was finalized at USD 3.2 billion value intermidiated by Swiss Federal Department of Finance, Swiss National Bank and Swiss financial regulator FINMA. Around $17 billion worth of AT1 bonds (which comes with inherent risk profile), were wiped out whereas equity shareholders of Credit Suisse will receive 1 share in UBS for 22.48 shares. The merger is expected to be completed by the end 2023.
The complete write-off of AT1 bonds (also known as Contingent Convertible) has rattled the entire $250 billion asset class, particularly popular with European banks. Capital structure of a bank (or any company in general) would cause the equity holders to take the hit first instead of bondholders. Therefore, as expected some bondholders are exploring legal options and possible litigation against the merger.
Also the Federal Reserve, inspite of turmoil in the banking sector, has moved ahead with 25 basis points hike (as we expected). The fed funds rate now stands at 4.75%-5.00% with year end rate forcasted (per Fed model) at 5.1%. As we mentioned before, the banking system is not out of the woods yet despite the heavy governmental and regulatory bodies intervention. Shares of German investment bank Deutsche Bank AG plummeted around 14% today as cost of insuring against its bonds default (credit default swaps) rose sharply, before recovering half of the losses.
Last updated on April 12th, 2023 at 07:40 am