Swiss multinational banking group UBS announced that it was acquiring its smaller peer Credit Suisse in an all-share transaction worth $3.2 billion late on Sunday night.
The transaction is expected to close in the second quarter of 2023 and has full government approval as it was facilitated by the trio of the Swiss National Bank, the Swiss Federal Ministry of Finance and FINMA, the Swiss market regulator.
Swiss authorities have pushed the deal through based on emergency powers which ensures that the deal will not require any shareholder approval.
The follows a five-day ordeal for Credit Suisse, that saw it unable to raise capital adequately and threatened to send Switzerland's second largest lender into potential collapse. The speed at which it was struck is also a hallmark feature of this deal; coming at a time of perceived weakness in the global banking space with a series of bank failures in the United States.
But while these US banks were largely regional and experts did not think it would pose a systematic contagion risk, Credit Suisse was a systematically important bank for the global financial system.
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Here's what you need to know about the transaction
1. What are the details of the transaction?
This is an all-share transaction, which means that existing Credit Suisse shareholders will get shares of UBS at a fixed ratio of 1 UBS share for every 22.48 shares of Credit Suisse held that translates to 0.76 Swiss francs per share. This implies a total consideration of three billion Swiss francs, which translates to $3.2 billion.
The price of the transaction is below the market price of Credit Suisse on Swiss exchanges at 1.86 Swiss francs per share as of Friday.
Such transactions, where a target company is valued at a price below its prevailing market price, is a sign of a company that is in distress.
Though Additional-Tier 1 bondholders of Credit Suisse are a loss, as these holdings worth 16 billion Swiss francs have been effectively wiped out. These bonds have lower precedence and are riskier as compared to other debt instruments and can be converted into equity or written down.
"UBS' CEO Ralph Hamers told analysts that the decision to write down the AT1 bonds to zero was taken by FINMA, so it would not create a liability for the bank", Reuters reports.
2. Are there any elements of government support to it?
Yes, the transaction has been facilitated by and is supported by institutions of the Swiss government.
In a statement, the Swiss Council - the governing body of Switzerland - welcomed the deal.
It said that the Swiss National Bank will provide additional liquidity to Credit Suisse until the transaction goes through by providing the former with bankruptcy privilege rights and a default guarantee assistance in case Credit Suisse defaults.
"With the measures taken it is ensured that the SNB is able to provide Credit Suisse with sufficient liquidity if necessary. Strict conditions are in place for drawing on this liquidity assistance. The Federal Council will also impose restrictions in regard to remuneration packages, pursuant to Article 10a of the Banking Act", the statement said.
However, in a regulatory gray area, the Swiss government has drawn on emergency powers to push the transaction through; meaning that the deal will not need any shareholder approval.
Sources told the Financial Times that there was limited contact between the banks and that the deal was heavily influenced by the regulators.
To protect UBS, the government is giving it a guarantee of nine billion Swiss francs to cover potential losses, only applicable over certain thresholds.
3. Will the transaction be approved?
While the transaction is expected to sail through in Switzerland, both UBS and Credit Suisse have multinational businesses and will be looking for regulatory approval abroad.
Key markets where they will be looking at for approval are in East Asia, the European Union, the United Kingdom and the United States. More information on this is expected in the coming weeks.
However, a source also told the Financial Times that the Federal Reserve in the United States has given its assent to the deal.
4. Why was Credit Suisse in a bad position in the first place?
The most recent reason as to why Credit Suisse fell is since its backers in Saudi Arabia did not pledge additional support to the bank on March 15. The Saudi National Bank, Credit Suisse's largest investor, refused to infuse more capital into the bank, citing regulatory challenges. They already own a near 10% stake in the bank.
Following the announcement, shares of Credit Suisse hit all-time lows for two day straight, falling below the two franc mark.
If the UBS deal had not fallen through, the Swiss government was considering nationalising Credit Suisse.
Troubles at Credit Suisse predate the current hiccups in the global banking space and span both corruption and governance misconduct.
Last year, an investigation reported by the Guardian following a data leak showed that Credit Suisse held the wealth of clients involved in trafficking, torture, money laundering and corruption. The bank rejected allegations that it had gone rogue.
In a compilation done by Reuters, the bank was convicted of being unable to prevent money laundering related to cocaine-based narcotics trades. In 2020, the CEO of the bank Tidjane Thiam quit after the bank was accused on operationalising spies through private detectives in seven different instances between 2016 to 2019.
"In a rare rebuke, the regulator said there were serious organisational shortcomings at Credit Suisse and that the bank had even tried to cover its tracks by doctoring an invoice for surveillance", the report says.
Further, Credit Suisse pleaded guilty to fraud after it arranged for a $800 million loan to Mozambique for a fishing fleet, which was grossly overvalued. $200 million of the loan reportedly were paid in kickbacks to Credit Suisse bankers and to Mozambique government officials. An undisclosed loan was also arranged that was kept secret from the International Monetary Fund (IMF). The IMF pulled out of an assistance program following the revelation of $1.4 billion in undisclosed loans.
5. How have markets reacted?
Markets in Europe just opened lower as of 2 pm IST, with banks tumbling the most. Benchmark indices are down: the FTSE 100 is down 1.3% in the United Kingdom, the DAX 1.5% in Germany, SSMI is down 1.68% in Switzerland.
UBS has skid 14%, trading at 17.12 francs and Credit Suisse 64% at 0.68 francs after the takeover.
The Euro Stoxx bank index is down 6%, in signs that the banking sector troubles are persistant in the eurozone. The Euro Stoxx indices do not include non-eurozone banks.
