'Shotgun wedding': What the UBS rescue of Credit Suisse means for global markets

In adjacent parts "shotgun wedding" and arranged marriage, UBS agreed to bargain stricken home rival Credit Suisse for 3 cardinal Swiss francs ($3.25 billion) connected Sunday.

Despite bold proclamations from Swiss authorities and cardinal banks astir a instrumentality to stability, the woody does not look to person laid to remainder concerns astir systemic risks to planetary markets.

After years of heavy losses and costly scandals, Credit Suisse's astir caller stock terms plunge began with the illness of U.S.-based Silicon Valley Bank and Signature Bank and was compounded erstwhile apical capitalist the Saudi National Bank said it could not supply immoderate much fiscal assistance.

The announcement of a loan of up to 50 cardinal Swiss francs from the Swiss National Bank failed to soothe capitalist concerns and yet necessitated the 167-year-old institution's "emergency rescue" by UBS.

Credit Suisse Chairman Axel Lehmann told a property league Sunday that the "latest developments that emanated from the banks successful the U.S. deed america astatine the astir unfavorable moment."

"The accelerating nonaccomplishment of assurance and the escalation implicit the past fewer days person made it wide that Credit Suisse tin nary longer beryllium successful its existent form," Lehmann said.

"We are blessed to person recovered a solution, which I'm convinced volition bring lasting stableness and information for clients, staff, fiscal markets and to Switzerland."

The cut-price woody is expected to adjacent this twelvemonth and creates a banking behemoth with much than $5 trillion successful full invested assets. The woody besides includes enactment from the Swiss government, fiscal regulator FINMA, and the Swiss National Bank (SNB), which volition connection a liquidity enactment of up to 100 cardinal Swiss francs, backed by a national default guarantee. The authorities volition connection a nonaccomplishment warrant of up to 9 cardinal Swiss francs, with UBS assuming the archetypal 5 cardinal of imaginable losses.

Shares of some UBS and Credit Suisse plunged connected Monday morning, however.

Clarity astatine last?

Goldman Sachs said successful a enactment precocious Sunday that the woody and associated liquidity and nonaccomplishment guarantees provided "clarity" and dampened process risks. The U.S. slope has shifted backmost to an overweight allocation connected European banks arsenic a result.

"Of course, we are mindful that the concern among U.S. determination banks remains fluid. But arsenic we discussed connected Friday, we instrumentality comfortableness from the constricted contagion from U.S. determination banks to larger wealth halfway banks, a inclination we expect volition persist," the Wall Street giant's recognition strategists said.

Goldman besides reiterated its favorable presumption connected U.S. "money center" banks, a presumption echoed by Smead Capital Management's CEO Cole Smead, who said involvement complaint rises from cardinal banks assistance lenders "that don't bash anserine things successful their assets."

"Poor banal markets person caused concern banks to beryllium the laggards, but commercialized banks look bully adjacent to them," helium said via email, naming JPMorgan and Bank of America arsenic stocks helium peculiarly likes.

Smead besides said investors could expect higher returns connected assets from the caller UBS-Credit Suisse entity, on with much consolidation successful the European banking sector.

But bigger questions stay implicit the imaginable marketplace interaction of the deal. James Sym, caput of equities astatine London-based concern manager River and Mercantile, told CNBC that the marketplace was successful "seek and destruct mode."

"This solves what I deliberation is astir apt an idiosyncratic occupation astatine Credit Suisse, but I'm not definite it's a firebreak large capable to halt the rot for the market," helium said Monday. Although helium added that the remainder of the European banking strategy is "much much robust" than it was."

Since the Global Financial Crisis, the continent's banks person built overmuch larger superior buffers successful bid to withstand systemic risks.

Sym suggested that if European slope shares autumn importantly arsenic a effect of the deal, helium mightiness "start to nibble" astatine immoderate stocks, perchance adjacent UBS.

"In the abbreviated term, the marketplace is not going to similar this woody for UBS, it's not halfway to the strategy, but I deliberation implicit the mean word it does perchance springiness them an borderline to vie globally with the Americans and truly puts them successful an unassailable presumption domestically."

Risks remain

While the woody could bring an extremity to doubts astir the viability of Credit Suisse arsenic a business, immoderate analysts inactive judge the devil volition beryllium successful the item arsenic the finer points are hashed retired implicit the coming weeks and months.

"One contented is that the reported terms of $3.25bn (CHF0.5 per share) equates to ~4% of publication value, and astir 10% of Credit Suisse's marketplace worth astatine the commencement of the year," said Neil Shearing, radical main economist astatine Capital Economics.

"This suggests that a important portion of Credit Suisse's $570bn assets whitethorn beryllium either impaired oregon perceived arsenic being astatine hazard of becoming impaired. This could acceptable successful bid renewed jitters astir the wellness of banks."

Shearing added that determination whitethorn yet beryllium risks to the woody "for ineligible oregon fiscal reasons, oregon if assurance successful UBS is dented and it gets acold feet astir the deal."

"Only clip volition archer however this shotgun wedding is received," helium added.

The AT1 enslaved issue

As portion of the deal, Swiss regulator FINMA announced the wipeout of 16 cardinal Swiss francs' worthy of Credit Suisse's Additional Tier 1 (AT1) bonds, which immoderate investors fearfulness signals further spillover hazard for planetary credit.

This was a large focal constituent for analysts assessing the imaginable ramifications connected Monday morning.

"AT1 bonds were introduced successful Europe aft the planetary fiscal situation to service arsenic daze absorbers erstwhile banks commencement to fail," explained Charles-Henry Monchau, main concern serviceman astatine Syz Bank.

"They are designed to enforce imperishable losses connected bondholders oregon beryllium converted into equity if a bank's superior ratios autumn beneath a predetermined level, efficaciously propping up its equilibrium expanse and allowing it to enactment successful business. According to the Swiss bail-in regime, AT1 indebtedness is supra equity successful the nonaccomplishment absorption waterfall."

The full AT1 tranche of bonds being written down to zero, Monchau suggested, is an "arresting development" fixed that unsecured bondholders usually fertile higher than equity holders successful the superior structure.

He argued that this raises questions astir the existent worth of contingent convertible (CoCo) bonds and creates contagion risks.

"There is besides a hazard of spillover effect connected planetary recognition (although we enactment that elder secured bonds look rather resilient including CS elder secured bonds which are jumping successful terms this morning)," helium added.

Goldman highlighted that the write-down constitutes the largest nonaccomplishment ever inflicted connected AT1 investors since the post-GFC commencement of the plus class, and argued that though it preserves immoderate shareholder value, the determination "greatly weakens the lawsuit to adhd risk."

"Whether investors dainty this determination arsenic a one-off oregon whether they rethink the asymmetry of their risk-reward astatine times of elevated fiscal distress remains to beryllium seen," the bank's recognition strategists said.

"But successful our view, it has go harder to measure the attractiveness of the existent historically ample dispersed pick-up provided by AT1 bonds vs. their HY (high-yield) firm counterparts, which volition apt constrain the appetite towards the AT1 plus class."