To Ease Concerns About The Deal's Risks, UBS Offers A Bond Buyback

Having agreed to takeover Credit Suisse Group AG, UBS Group AG is offering to buy back bonds issued before it agreed to buy it out. The deal sent UBS' credit risk soaring.

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As a way to calm concerns about the risks associated with this deal, Switzerland's largest bank has invited holders of its senior bonds to sell the bonds back after the acquisition. The stock has soared after UBS picked up its rival for a relatively cheap price, but UBS' bond prices have decreased in recent days and credit rating agencies have changed their outlooks on its debt as a result. 

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There has been an increase in UBS' stock price over the past two years based on a promise of stability, but now it is committing itself to a complex integration process and restructuring effort that will result in a cost reduction of at least $8 billion. As for the Swiss firm's bad will, it has 56 billion francs to cover some losses, and it has a government guarantee for some losses, so it is betting that the payoff will be worth it to add to its profitable wealth business. 

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Oversea-Chinese Banking Corp. a credit analyst at the bank, said the decision was fair because it would provide investors with the chance to sell back their bonds if they did not wish to invest based on what they now know, says Andrew Wong, a credit analyst at the bank.

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It issued a buyback offer for 2.75 billion euros ($3 billion) of senior unsecured notes due in March 2028 and March 2032, noting that "exceptional corporate actions" took place on March 19. As a result of Silicon Valley Bank's collapse earlier this month, UBS agreed to buy its rival in a government-brokered deal to calm the financial markets. 

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While shares of the bank fell 2% on Wednesday, the bank's senior euro-denominated bonds rose 11% since the offer was announced, making it one of the biggest jumps among European banks this week, according to calculations.

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It has been reported that UBS's credit risk has been jolted since concern was expressed over Credit Suisse's fate, and UBS' role within its, roiled global markets. Upon the announcement of a deal over the weekend, UBS's one-year debt insurance costs soared to an all-time high. The holding company's credit default swaps soared at the largest rate ever for its operating company, UBS AG. However, the holding company's credit default swaps also surpassed those of its operating company, UBS AG, by a considerable margin. 

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As a banking credit analyst with ING Groep NV, Suvi Platerink Kosonen, who works for the bank, said in the morning that UBS Group is taking over the Credit Suisse acquisition risk, while its operating company should continue to be well protected. As a result, it makes perfect sense that group spreads would widen and underperform the OpCo from that perspective.

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In its outlook on UBS Group's A- rating, S&P Global Inc. has revised its outlook based on the execution risk originating from the acquisition to negative from stable, while maintaining its outlook on the operating company as unchanged. 

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There were two bail-in bonds issued on March 9 at a time when SVB Financial Group started experiencing problems. Trade Algo compiled pricing from the 2032 note at 12:30 pm on Wednesday, which was below the re-offer price of 99.518 cents. This is below the price indicated for the 2032 note at 12:30 pm. There was a price indicated for the 2028 debt of 99.67 cents and a price re-offered of 99.932 cents.

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As risky as these securities may be, they are still a lot safer than Additional Tier 1 notes, which are the least senior bonds in a bank's debt structure since they are the most junior ones.

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I think it is fair and reasonable for investors to take a second look at risks if they need to consider them more carefully. This will help to boost sentiment eventually even if it doesn't happen immediately," said Gary Ng, senior economist for Natixis SA.