Here Are Key Takeaways From UBS’s Historic Credit Suisse Deal

An emergency ordinance, a government backstop, and shareholders coming out better than some bondholders: UBS Group AG’s government-brokered deal to buy Credit Suisse Group AG is historic, complex and unique.

(Bloomberg) — An emergency ordinance, a government backstop, and shareholders coming out better than some bondholders: UBS Group AG’s government-brokered deal to buy Credit Suisse Group AG is historic, complex and unique. 

The first merger of two banks both deemed systemically important since the financial crisis almost 15 years ago was put together in a matter of days. 

UBS is paying 3 billion francs for its battered rival in a deal aimed at avoiding a broader financial crisis. Switzerland backed the deal with a liquidity backstop, a guarantee to cover as much as 9 billion francs ($9.7 billion) of UBS’s losses, and by waiving the requirement to get shareholder approval. 

Here are the big takeaways:

The Terms

Credit Suisse shareholders will get UBS stock in a deal that values the bank at 3 billion francs. The firm was valued at about 7.4 billion francs at Friday’s close, around 20 billion a year ago, and more than 100 billion at its 2007 peak. 

The use of public funds mean that about 16 billion francs of additional Tier 1 notes be written off to zero. That means bondholders — typically seen as more senior in a bank collapse than shareholders — lost more. 

Read More: Credit Suisse’s $17 Billion of Risky Bonds Are Now Worthless

Credit Suisse’s statement said the deal is expected to close by the end of the year and UBS Chairman Colm Kelleher said there were no options for UBS to back out. Switzerland’s government used an emergency ordinance to avoid the need for a shareholder approval. 

Kelleher and UBS Chief Executive Officer Ralph Hamers will retain their roles in the combined entity. A representative for FINMA, the Swiss regulator, said at a Sunday press conference announcing the deal that Credit Suisse’s management will stay in place until the deal closes. Then, their future becomes a decision for UBS.

“This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” Kelleher said in the UBS statement.

Business Future

Kelleher was also clear that UBS is excited about Credit Suisse’s wealth management business and Swiss business; not so much about its investment bank. 

A UBS press release emphasized that the combined firm will have $5 trillion of client assets. And Kelleher said the firm was determined to keep Credit Suisse’s profitable Swiss unit, despite concerns about concentration in the domestic market from this deal. 

But the investment bank will be shrinking, likely ending the dreams of a CS First Boston spinoff. 

“Let me be very specific on this: UBS intends to downsize Credit Suisse’s investment banking business and align it with our conservative risk culture,” Kelleher said at the press conference. 

Job Cuts

Kelleher said it’s too soon to know a job-cut number, but UBS gave indications it will be significant. The firm said it plans to cut the combined company’s annual cost base by more than $8 billion by 2027. That’s almost half of Credit Suisse’s expenses last year. 

Read More: Credit Suisse’s 9,000 Job Cuts Are Foretaste of UBS Takeover

The UBS chairman said he understands the coming months will be “difficult” for Credit Suisse staff and promises UBS will do what it can to keep the uncertainty as short as possible.

Government Support

Both banks have unrestricted access to the Swiss National Bank’s liquidity facilities. And the Swiss government promised to swallow as much as 9 billion francs “arising from certain assets that UBS takes over as part of the transaction, should any future losses exceed a certain threshold.”

The government’s loss-guarantee was necessary because there was little time to do due diligence and Credit Suisse has hard-to-value assets on its books that UBS plans to wind down, Kelleher said. If that results in losses, UBS would assume the first 5 billion francs and the federal government the next 9 billion francs. Any further hits would have to be shouldered by UBS.

Kelleher described that government guarantee as an “insurance policy” and said UBS’s “significant first-loss” position means it has no incentive to use the guarantee unless absolutely necessary.

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