UBS is offering to buy back bonds that were issued days before it agreed to take over troubled rival Credit Suisse, a deal that sent a gauge of its credit risk soaring.
Switzerland’s biggest bank invited holders of its senior unsecured notes due in March 2028 and March 2032, totalling €2.75 billion ($3 billion), to exchange the securities for cash at their respective re-offer price, citing the “exceptional corporate actions” of March 19.
That was the day UBS agreed to buy its rival in a government-brokered deal aimed at containing a financial market sell-off triggered by the collapse of Silicon Valley Bank earlier this month. The bank’s senior euro-denominated bonds rose.
The decision was a “reasonable action to give investors the option to sell back the bonds should they, having known what they know now, have chosen not to invest”, said Andrew Wong, a credit analyst at the Oversea-Chinese Banking Corporation.
After a deal was announced at the weekend, the cost of insuring UBS’s debt for a year soared to a record. The credit default swaps for the holding company also rose above those for its operating company, UBS AG, by the most on record.
“UBS Group is the entity that is taking over the risk from the Credit Suisse acquisition, while its operating company should remain better protected,” Suvi Kosonen, a banking credit analyst with ING Groep, said on Tuesday.
“From that angle it makes sense that the spreads of the group will widen and underperform against the OpCo [operating company].”
S&P Global revised its outlook on its “A-” rating on UBS Group to negative on execution risk from the acquisition, but maintained a stable outlook on the operating company.
The two securities issued on March 17 include a fixed 4.62 per cent note due March 2028, and another at a fixed 4.75 per cent due March 2032.
The buyback offer opens on March 22, with the early expiration deadline on March 28 and the final expiration deadline on April 4.
“The issuer has decided to launch this exercise as a result of a prudent assessment of these recent developments and the issuer's long-term commitment to its credit investors,” UBS said. A bank spokesman declined to comment when contacted.
The bonds were priced in the public market on March 9 and were settled on March 17. There is typically a period of grey market trading between a bond's pricing and settlement.
The two “bail-in” bonds were priced on March 9, around the time that the first signs of trouble emerged at SVB Financial Group.
The 2032 note was indicated at a price of 99.06 cents at 9.40am in London on Wednesday, below its re-offer price of 99.51 cents, according to pricing compiled by Bloomberg.
The 2028 debt was indicated at 99.84 cents with a re-offer price of 99.93 cents.
These securities are risky but they are still safer than Additional Tier-1 notes, which are the most junior bonds in a bank’s debt pile.
“It seems fair and reasonable to let investors think twice if they need to reconsider the risks, which is helpful in shoring up sentiment eventually if not immediately,” said Gary Ng, senior economist at Natixis.