Credit Suisse Paths Narrow on Low UBS Bid, Government Aid Talks

Swiss authorities are weighing unprecedented steps to force through a UBS Group AG takeover of Credit Suisse Group AG, with the risk of some form of nationalization rising by the minute before markets open on Monday.

(Bloomberg) —

Swiss authorities are weighing unprecedented steps to force through a UBS Group AG takeover of Credit Suisse Group AG, with the risk of some form of nationalization rising by the minute before markets open on Monday.

UBS is offering to buy Credit Suisse for about 1 billion francs ($1.1 billion), a deal that the troubled Swiss firm is pushing back on with backing from its biggest shareholder, Saudi National Bank, people with knowledge of the matter said. But its negotiating leverage is limited as other options may be even more painful for its equity and bond investors. 

Swiss officials are weighing changes to the law to avoid the need for shareholder votes on the deal, some of the people said. They are considering a full or partial nationalization of Credit Suisse as a fallback option if a UBS deal collapses with time running out, said some of the people, who asked for anonymity discussing private deliberations.

As regulators and bankers race toward a deal aimed at calming markets, officials are left grappling with brutal choices between trampling over shareholder rights or risking the escalation of the crisis. A low-priced deal with no say for owners risks lawsuits and hurdles to future international investors putting money into Switzerland. No resolution in the next 12 hours risks something even worse.

Credit Suisse, which ended Friday with a market value of about 7.4 billion francs ($8 billion), believes the UBS offer is too low and would hurt shareholders and employees who have deferred stock, said the people. The book value of Credit Suisse’s equity ended last year at 45 billion francs.

A major question is whether Credit Suisse should still be viewed as the bank that regulators declared on Wednesday night had plenty of capital and liquidity and was dealing with a market panic. But Swiss regulators are concerned by clients and counterparties pulling away from the bank over the last week, and officials from the US and elsewhere are pushing for a definitive solution by the time markets open Monday to avoid any contagion fears hitting markets or other financial firms.

The UBS offer was communicated on Sunday with a price of 0.25 francs a share to be paid in stock. Credit Suisse closed down 8% to 1.86 francs at the close on Friday. 

Swiss authorities are seeking to broker a deal that would address a rout in Credit Suisse that sent shock waves across the global financial system over the past week when panicked investors dumped its shares and bonds following the collapse of several smaller US lenders. Years of struggles came to a head after the firm said its efforts to win back clients hadn’t halted outflows this year and the Saudi National Bank ruled out taking a larger stake. 

A liquidity backstop by the Swiss central bank briefly arrested the declines, but the market drama carries the risk that clients or counterparties would continue fleeing, with potential ramifications for the broader industry.

UBS is trying to protect itself if it takes on a large, complex rival with little time to fully vet its books. It’s seeking a government backstop for certain legal and other costs that may emerge in the future, Bloomberg reported Saturday. UBS also insisted on a material adverse change that voids the deal if its credit default spreads jump by 100 basis points or more, the Financial Times reported.

“Obviously UBS has no pressure to buy a bunch of mismanaged risk exposure at market levels” said Frederik Hildner, managing director at Confluente Capital. “Their bid of 0.25 CHF per share indicates that CS is in deep trouble and potentially worthless. Shares are poised for a hard slump on Monday unless other solutions come to rescue tonight.”

If government money was put directly into Credit Suisse, Swiss officials would likely require the bail-in of debt and holders of additional tier 1 notes to potentially bear losses, one of the people involved in the discussions said. Credit Suisse had about 15 billion francs of AT1 securities and 49 billion francs of bail-in debt instruments at the end of 2022. 

The complex discussions over what would be the first combination of two global systemically important banks since the financial crisis have seen Swiss and US authorities weigh in, according to people with knowledge of the matter. Talks accelerated Saturday, with all sides pushing for a solution that can be executed quickly.

Credit Suisse’s process of cutting 9,000 jobs in an effort to save itself would be escalated should the firm be taken over by UBS, according to people familiar with the discussions, with one person estimating the final toll could be a multiple of that number. The two lenders together employed almost 125,000 people at the end of last year, with about 30% of that in Switzerland.

–With assistance from Jan-Patrick Barnert and Blaise Robinson.

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