While holders of Credit Suisse AT1 bonds were left holding the bag following its takeover by UBS, holders of its senior bonds are poised to benefit.
With Credit Suisse now absorbed into UBS, not only will its shares disappear, but around $200 billion of the bank's outstanding senior bonds will transfer to the buyer.
While Credit Suisse's AT1 «coco bonds» (contingent convertibles) amounting to $17 billion were written down at the time of the March 19 takeover, the holders of its senior debt securities are likely to benefit. This is primarily due to the different risk profiles of the banks and their credit ratings, as «Financial News» reports.
High Risk Premium
Credit Suisse was recently rated BBB- by S&P, just within the range of an investment grade, with the higher risk premium reflected in its bond prices. Recent bond issues had Credit Suisse offering high coupons with interest rates of up to nine percent to attract investors.
Senior unsecured bonds must be repaid on a priority basis in the event of default. One of Credit Suisse's latest senior bonds had a volume of 3 billion euros ($3.2 billion) and a coupon of 7.75 percent, maturing in 2029.
Shift to UBS
When issued, the bond was trading around par but crashed in March on news of Credit Suisse's dire circumstances. Since the takeover was announced, the bond traded at around 110, well above its issue price.
The takeover shifts the risk to UBS, which puts Credit Suisse bonds in a more favorable light.
«In an M&A transaction, it is normal to see some risk premium being priced in bonds issued by the weaker company until the deal is actually completed, especially when the issuers have different credit ratings,» says credit analyst Giovanno Franco.
Negative Outlook
For Credit Suisse bondholders, it means receiving the same yield for a lower risk. UBS's rating is A-, albeit with a negative outlook due to execution risks, which is unlikely to soon change.
On the occasion of the execution, S&P reiterated its negative outlook, justifying it by the execution risk of the integration and restructuring of Credit Suisse.
Fitch Lowers Ratings
Meanwhile, Fitch has lowered UBS's credit ratings following the completion of the distressed takeover. The long-term issuer default rating (IDR) for UBS Group falls to 'A' from 'A+' and for UBS AG to 'A+' from 'AA-'. The agency had already placed UBS on its Rating Watch Negative list on March 21. Fitch cites the deteriorated business and risk profile, the expected complex and lengthy integration, and execution risks.
