American equities advanced towards the end of last week following the news of UBS acquiring the troubled Swiss bank Credit Suisse. The Swiss authorities supported the acquisition, emphasizing the importance of restoring trust in financial markets and mitigating risks for the nation and its people.
In addition, the Swiss National Bank (SNB) will offer significant liquidity support to facilitate UBS’s acquisition of Credit Suisse. This agreement has profoundly impacted financial markets, with the CoCo bonds (contingent convertible debt) market experiencing particularly noticeable effects.
UBS Acquires Credit Suisse
UBS has agreed to acquire Credit Suisse for a sum of $3 Swiss francs (about $3.25 billion), which is roughly 60% lower than the bank’s valuation at the close of the market on Friday.
Afterward, Credit Suisse’s stock plummeted by 56%. As per the all-stock deal, Credit Suisse shareholders are set to obtain one UBS share for every 22.48 Credit Suisse shares they own, translating to CHF 0.76 per share and a total consideration of three billion Swiss francs.
Furthermore, the combined business might manage over $5 trillion in combined invested assets and present long-lasting value prospects.
Swiss Government Supports the UBS
The Swiss Government has endorsed UBS’s takeover of Credit Suisse. Due to liquidity issues and market fluctuations, the authorities determined that it was no longer possible to regain the essential trust and that a quick, stabilizing resolution was vital.
Moreover, the Government expressed its belief that UBS’s acquisition of Credit Suisse is the most effective approach to reinstating faith in financial markets and controlling the risks faced by the nation and its people.
The Swiss National Bank (SNB) will offer significant liquidity assistance to help UBS’s acquisition of Credit Suisse. Also, the Swiss Federal Government, FINMA (the Swiss financial market supervisory authority), and the SNB have all backed the purchase.
Furthermore, the SNB has expressed that, through UBS’s acquisition of Credit Suisse, a resolution has been reached to ensure financial stability and safeguard the Swiss economy amid these extraordinary circumstances, so both can gain liquidity from the SNB.
CoCo Bonds Tumble as Credit Suisse Deal Upends Debt Hierarchy
The financial markets have experienced considerable turbulence following UBS’s acquisition of Credit Suisse, with the CoCo bonds (contingent convertible debt) market being particularly impacted. CoCo bonds, created as buffers during market turmoil, have seen a significant drop in value.
Moreover, the AT1 Capital Bond exchange-traded fund by Invesco, which monitors the value of AT1 debt issued by banks, has decreased by 15%, as reported by The Guardian.
Investors are alarmed that Credit Suisse’s AT1 bonds are getting wiped out, even though the bank’s equity remains partially intact (with shareholders facing a 60% reduction). Generally, AT1 bonds hold a higher position than equity in the debt hierarchy.
Neil Wilson, the chief markets analyst at Markets.com, has reported that this evident disruption of the debt hierarchy will have consequences. Charles-Henry Monchau, chief investment officer at Syz Bank, also expressed concern about potential collateral damage to the global credit markets.
Impact on US Stocks and Global Markets from the UBS Acquisition
New York Community Bancorp shares soared over 33% after announcing its intention to acquire $38.4 billion in assets and nearly all deposits from the failed Signature Bank. This surge followed the stock’s largest recorded jump earlier in the day.
Additionally, gold continued its upward trend as investors pursued safer investments, reaching its highest level in almost a year. Bitcoin also experienced a nine-month peak, which is excellent news for all crypto investors.
Amid ongoing concerns about banking sector contagion, West Texas Intermediate, the US oil benchmark, dropped to $65 a barrel, the lowest since 2021.
Following Silicon Valley’s collapse over a week ago, regional banks remain under stress. Signature banks have shaken the financial sector, leading to customers fleeing and banks scrambling to restore confidence in their deposit security.
Since the global banking crisis began, central banks – as lenders of last resort – and some of the industry’s strongest players have supplied massive amounts of emergency funds to support struggling banks.
Over $400 billion has been provided in direct central bank support thus far. The US Federal Reserve is responsible for guaranteeing $140 billion in deposits for both Silicon Valley Bank and Signature Bank.
Additionally, the Swiss National Bank extended a $54 billion emergency loan to Credit Suisse and furnished UBS with 209 billion Swiss francs ($225 billion), Swiss state guarantees, and coverage against potential losses.
UBS’s Impact on the Global Markets
European bank shares have displayed fluctuations as investors continued to be concerned about greater issues in the industry.
During early trading last week, Germany’s Deutsche Bank and France’s BNP Paribas saw considerable declines, although both have since recovered some of their losses, as reported by the BBC. BNP remains down about 9.5%, while Deutsche Bank has dropped 14%.
Standard Chartered, HSBC, and Barclays initially experienced a dip in share prices in the UK. UBS, which agreed to buy its struggling Swiss peer for $3 billion, witnessed its own shares drop roughly 13%. Credit Suisse’s shares plummeted over 60% after UBS confirmed its acquisition plans over the weekend.
Experts had predicted a significant fall, as the BBC indicated that the last-minute deal on Sunday valued Credit Suisse at just above $3.15 billion, a mere fraction of its $8 billion worth on Friday.
Asian stock prices also experienced declines earlier, with Hong Kong’s Hang Seng index falling around 3% and Tokyo’s Nikkei decreasing by more than 1%, as cited by the BBC.
The takeover of Credit Suisse marks the largest collapse amid a confidence crisis in the banking sector, which also saw the downfall of Silicon Valley Bank in the US. Switzerland’s second-largest lender was considered too vital to fail, leading to a sudden acquisition by the nation’s authorities.
To counteract inflation, central banks around the globe have been raising interest rates. These rate hikes have affected the value of even secure investments held by banks, impacting investor confidence and bank share prices.
Against this backdrop, the BBC noted that two US mid-sized banks catering to the tech sector, Signature Bank and Silicon Valley Bank, collapsed this month.
Restoring Confidence in the Global Banking Sector
In summary, the Swiss Government and central bank-supported takeover of Credit Suisse by UBS represents a vital measure in reinstating trust in the global banking industry.
The influence on US stocks and international markets highlights the interlinked structure of the financial system and the significance of central banks’ assistance during difficult periods.
Furthermore, the repercussions on the CoCo bonds market and the disruption of the debt hierarchy highlight the possible chain reactions that such significant transactions can trigger across various financial instruments.
