UBS launches first AT1 bonds since Credit Suisse takeover

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UBS is looking to raise its first additional tier 1 bond since $17bn worth of the risky debt instruments were wiped out when it took over rival lender Credit Suisse. 

The Swiss bank launched a deal to raise new dollar AT1 bonds on Wednesday, split between debt that can be redeemed in five years and 10 years. AT1 bonds have a perpetual maturity and are designed to take losses in times of crisis.

Swiss authorities’ decision to write down $17bn of Credit Suisse’s AT1 bonds in March, as a condition of its shotgun marriage to UBS, provoked uproar and has led to at least $9bn of legal claims. 

While several European banks have come back to the AT1 market since then, the first Swiss lender to issue new bonds was eagerly by the market awaited to see how investors would react.

Credit Suisse AT1 investors have launched lawsuits against Finma, Switzerland’s financial regulator, and the country itself over the controversial decision to wipe out the debt.

The move shook up the traditional hierarchy of bank creditors and undermined confidence in AT1s, which were introduced after the financial crisis as regulators tried to shift risk away from depositors and imposed greater capital requirements on banks in case of failure.

UBS, which reported its first quarterly loss in six years on Tuesday as it was weighed down by the costs of taking over its former rival, is under pressure to issue billions of new AT1s in the coming years to make its capital stack more efficient.

UBS executives began sounding out investors over issuing new AT1s in September following the publication of the bank’s mid-year results, the Financial Times previously reported.

Filippo Alloatti, head of financials credit at Federated Hermes, estimated UBS had an AT1 shortfall of about $11bn.

The lender recently called a S$700mn ($516mn) Singaporean AT1 and has a $2.5bn bond that is callable at the end of January.

AT1s have no maturity date but can typically be called every five years by the issuer. Banks usually call AT1s when they are able to and reissue replacements.

UBS is marketing the five-year tranche at about 10 per cent yield and the 10-year at about 10.125 per cent.

Unlike previous UBS AT1s and the Credit Suisse bonds that were wiped out, the new AT1s will be able to be converted to equity rather than being written off should the bank run into difficulties. But that condition will only be activated after the terms are signed off at UBS’s AGM next year.

The bank said: “We will provide additional information when the offering is complete.”

S&P gave the new UBS AT1 a BB rating, five notches below its A- credit rating on the bank. “The terms and conditions of UBS Group AG’s AT1 issues together with the legislative framework give the Swiss authority the capability to determine whether a viability event has occurred, even if the capital ratio threshold has not been breached,” said the rating agency.

After Credit Suisse’s AT1 holders were left with losses, the European Central Bank and Bank of England were quick to announce that they would not have wiped out the bank’s bonds as Finma did.

As a result, eurozone banks such as BNP Paribas, BBVA and Bank of Cyprus have found it easy to find buyers when they re-entered the AT1 market during the summer.

On Tuesday, French lender Société Générale issued a dollar-denominated AT1 that was expected to amount to at least $500mn.