# The End of Credit Suisse!

An episode of [Patrick Boyle On Finance](https://invisiblenetwork.ai/podcast/1547740313), 22 Mar 2023, 24 min.

Audio: https://anchor.fm/s/fc0914e0/podcast/play/92761860/https%3A%2F%2Fd3ctxlq1ktw2nl.cloudfront.net%2Fstaging%2F2024-9-8%2F387759619-44100-1-41bfdd0fb7583005.mp3

Send us a textAfter a weekend of intense negotiations, Swiss authorities brokered an emergency deal to sell Credit Suisse the troubled 167-year-old investment bank to its Swiss rival, UBS. A $54bil lifeline from the Swiss National Bank last week failed to stem the crisis facing Credit Suisse following Silicon Valley Bank’s collapse: its share price collapsed and the flight of deposits accelerated. The deal has prevented a globally important bank from failing. Under the terms of the deal,...

## Transcript

[0:00] Hello and welcome, you are listening to Patrick boil on
[0:03] finance a podcast, exploring ideas, from quantitative Finance
[0:08] examining events occurring in markets right now and financial
[0:11] history to see what lessons can be taken away including
[0:15] interviews with some of the most interesting people in the world
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[0:22] dot-org over the weekend. We sought the sale of of Credit
[0:30] Suisse to UBS in probably the most dramatic Moment In global
[0:35] banking since the financial crisis of 2007-2008.
[0:40] As I discussed in my most recent podcast Credit, Suisse has been
[0:45] the problem child of European banking for quite some time now
[0:50] plagued by scandals, losses management, Shake ups and
[0:54] restructuring plans. They've been involved in every
[0:58] Scandal of the last They'd always managing to lose money,
[1:03] the bank was sold for 3.2 billion dollars in an all-stock
[1:08] deal. Meaning that shareholders were
[1:10] paid in shares of UPS rather than cash.
[1:14] This represents a huge discount to the firm's prior market value
[1:19] the Swiss government. Additionally guaranteed just
[1:23] under 10 billion dollars of the joint entities losses that it
[1:27] may suffer on certain port. Folios of assets,
[1:32] controversially the Swiss regulator fin me demanded that
[1:36] Seventeen point three billion dollars of credit.
[1:39] Suisse's additional, Tier 1 or 81 bonds be written off.
[1:45] Meaning that these debt holders did worst and stockholders which
[1:50] has surprised quite a few investors my podcast from last
[1:54] week wrapped up by saying that a sale to UBS was a distinct
[1:59] possibility. The and that was exactly what
[2:02] ended up happening. So today let's discuss the
[2:06] events that occurred over the weekend focusing in on the
[2:10] different treatment of equity, investors and 81 bondholders.
[2:15] Whose Wipeout is one of the more controversial elements of the
[2:19] deal. Will also look at who the
[2:21] largest holders of these Bonds were and what they have to say
[2:26] about the deal. So backing up a bit the
[2:29] important. Piece of news.
[2:31] That was not out there last week, was that on Wednesday, the
[2:34] Swiss National Bank this was regulator fin mama and the Swiss
[2:39] Minister of Finance called the Senior Management of Credit,
[2:43] Suisse they authorized the fifty four billion dollar backstop
[2:48] that we all knew about. But they delivered an additional
[2:52] message that day that Credit Suisse would have to merge with
[2:57] UBS and that the deal would need to be Worked out before Asian
[3:01] markets opened after the weekend on Monday, this was not optional
[3:07] a person briefed on the conversation told the financial
[3:11] times. So at the very time that this
[3:14] was Regulators were telling the market that everything was fine
[3:18] at Credit Suisse, they were telling Credit Suisse that the
[3:21] game was over. Okay.
[3:24] So Global markets were quite nervous.
[3:27] Last week as three US Banks had just gone under and more than 10
[3:32] billion dollars of wealthy clients money was being pulled
[3:35] out of Credit. Suisse every day, this added to
[3:39] the huge client withdrawals that had occurred during the last
[3:43] quarter of 2022 after rumors, had spread on social media in
[3:48] October, that the firm was on the verge of bankruptcy column
[3:52] Keller. Hurt the chairman of UBS was
[3:55] called in by the Swiss Regulators that Wednesday to and
[3:59] order to find a solution to save Credit.
[4:02] Suisse the other option of a government-controlled wind down,
[4:07] was neither attractive to The Regulators, or to the team at
[4:10] UBS as there were risks of contagion and a further,
[4:15] tarnishing of the reputation of Swiss banks globally.
[4:20] As I mentioned in that last podcast, Like this between
[4:24] Switzerland has two largest banks, is something that had
[4:28] been discussed for quite some time, but the main impediment
[4:31] was antitrust, regulations until last Wednesday.
[4:36] It was believed that the Swiss Regulators were committed to a
[4:40] to bank model no matter what during the credit crunch, the
[4:44] government had stepped in to rescue UBS using taxpayer money
[4:50] after it suffered huge losses, they Did this rather than allow
[4:55] the bank to be acquired. According to news reports, there
[4:59] was almost no direct contact between teams at the two Banks.
[5:03] While the deal was being negotiated.
[5:06] UBS was clear from the very start that they would only
[5:10] participate in the deal if it was cheaply priced and if you be
[5:14] as could be indemnified from any of the legal issues that Credit
[5:18] Suisse was potentially facing, probably a good idea.
[5:23] By Friday, the pace of customer withdrawals from Credit.
[5:27] Suisse was picking up and International Banks were
[5:30] starting to cut ties with the firm.
[5:33] The Regulators decided that without a deal occurring over
[5:37] the weekend, the bank was unlikely to open on Monday
[5:41] morning a team from the new york-based investment company,
[5:46] Black Rock flew to Zurich on Friday, morning to discuss a
[5:51] variety of options including Luding a partial acquisition or
[5:55] a wealth management partnership. But according to the Ft, the
[6:00] deals that were being pitched by BlackRock were unattractive to
[6:04] this with Regulators. A Chinese blockchain
[6:07] entrepreneur named Justin son. Apparently tweeted his interest
[6:12] in buying credit suite and transforming it into a crypto
[6:16] friendly Bank. Probably because so many of
[6:19] those have disappeared lately, I don't believe those Regulators
[6:24] have replied to his Twitter tried.
[6:26] Yet banking deals aren't traditionally struck over
[6:29] Twitter, it's usually a little bit more formal than that.
[6:33] He does have one of those Eight dollar blue takes, so it's
[6:36] probably a legitimate offer. But anyhow by late Friday, Black
[6:42] Rock had walked away across border deal.
[6:45] Would likely have been more complicated than one with UBS as
[6:49] us Regulators would have needed to get involved.
[6:53] Negotiations, between UBS and The Regulators continued all
[6:58] day, Saturday late in the day. The UBS team delivered a
[7:02] document offering 1 billion dollars in stock for the whole
[7:06] group, which included a break laws for UPS, linked to credit
[7:11] default swap. Spreads, this price was well
[7:15] below what the company had traded for on Friday's close the
[7:19] CDs provision would have likely killed the deal anyhow once With
[7:23] that. Now, Credit Suisse refused to
[7:26] sign this deal and they're Middle Eastern investors.
[7:30] Who would essentially sparked the Panic.
[7:32] Were Furious Saudi National Bank urged Credit, Suisse to reject
[7:37] the offer and calls went out from Credit.
[7:40] Suisse to various institutions, including Deutsche Bank in a
[7:45] last-ditch effort, to find an alternative, the complexity of
[7:49] the transaction and the short timeframe meant that there were
[7:53] no takers, the Swiss government had threatened to remove the
[7:57] Credit Suisse board. If they could not strike a deal
[8:01] and announced that they would introduce emergency legislation
[8:06] to strip the shareholders of both Credit.
[8:08] Suisse and UBS of the right to vote on any deal.
[8:14] The regulator's pushed UBS to increase their prize, ramping
[8:18] up, pressure on both sides. UBS came back with an offer of
[8:23] And a quarter billion dollars in stock, but if they were going to
[8:27] pay this price, they wanted more support from the Swiss
[8:30] government including a 100 billion Swiss franc liquidity
[8:35] line from the Swiss National Bank and the government lost
[8:38] guarantee of up to nine billion. Swiss Francs after UBS had borne
[8:44] the first five billion Swiss franc loss itself.
[8:48] Time was running out and the team at Credit Suisse were still
[8:51] Furious about how things. Is were working out at this
[8:55] point. Both sides.
[8:56] Had not really even sat down together despite their offices
[9:01] essentially facing each other across a square in Zurich, the
[9:06] Swiss government made one, additional tweak to the deal so
[9:10] that it would be more palatable for Swiss citizens and the
[9:14] bank's Equity investors. They decided to impose just over
[9:18] 17 billion dollars worth of losses on credit suisse's.
[9:23] Additional Tier 1 or 81 Capital bonds.
[9:28] These are a type of bond that was introduced in the wake of
[9:31] the credit crunch that are designed to take losses when
[9:35] financial institutions run into trouble.
[9:38] Normally they're not triggered if shareholders receive money as
[9:42] part of a takeover but the bond documentation, in this case,
[9:47] specifically states that a writedown may occur even if
[9:51] existing preference There's participation certificates and
[9:56] ordinary shares of Credit. Suisse group remain outstanding.
[10:00] I don't need to show you a chart of these bombs.
[10:03] They went 2-0. The fact that this provision
[10:06] existed in the bond contract allowed Swiss authorities to
[10:11] disregard the normal order of priority, and they likely chose
[10:15] to do. So, to save some face with
[10:18] International Equity holders, after denying the mother vote on
[10:22] the trend, Action. Particularly the investors from
[10:26] the Middle East which is an important customer base for both
[10:30] Banks, wealth management operations.
[10:33] Credit, suisse's board went through the final contract and
[10:38] after Consulting, with their advisors, signed the deal.
[10:42] A press conference was quickly pulled together.
[10:45] This is no bail out. This was Finance.
[10:48] Minister said, this is a commercial solution.
[10:52] She went on to say, Say, the failure of a systemically
[10:55] relevant bank would have had severe repercussions and
[10:59] Switzerland needs to be aware of its responsibilities Beyond its
[11:03] own borders. Actually, man, the chair of
[11:07] Credit Suisse said that given recent extraordinary and
[11:11] unprecedented circumstances, they announced merger represents
[11:16] the best available outcome Kelleher.
[11:20] From UBS said that it was a historic.
[11:23] A that he had hoped would never come and that while the
[11:26] acquisition is attractive for UBS shareholders, he wanted to
[11:31] be clear that as far as Credit Suisse is concerned.
[11:35] This is an emergency rescue the combined bank, that will result
[11:40] from this transaction will be huge for Switzerland.
[11:44] Its assets come to roughly twice the size of the Swiss economy.
[11:49] If each individual Bank was deemed too big to fail.
[11:53] The new entity will be of even greater systemic importance.
[11:57] UBS will have a huge market, share in Switzerland, giving it
[12:01] a near Monopoly. In the country antitrust,
[12:05] measures were waived to get the deal done quickly, and you have
[12:09] to wonder if this domestic Monopoly will cause problems for
[12:14] Swiss bank customers, or if the new entity will be slowly broken
[12:18] up in the coming years, UBS will have to make sure that its
[12:23] capital ratios are high enough to support the new much larger
[12:28] bank. They announced after the deal
[12:31] that the bank remains capitalized well above its
[12:34] Target of 13% switch Regulators announced that the Takeover will
[12:40] result in a larger bank for which the current regulations
[12:44] require higher Capital buffers but they will grant appropriate
[12:49] transitional period. For these to be built up.
[12:53] The Swiss government has of course, come under attack from
[12:56] bondholders and international Regulators for its handling of
[13:01] this shotgun wedding. The decision to favor
[13:04] shareholders at the expense of bondholders raised.
[13:08] Many eyebrows with investors in similar bonds issued by other
[13:13] Banks worrying that they too could be sacrificed in a similar
[13:17] scenario in the future 81 Bond. Bonds issued by other European
[13:22] Banks, sold off sharply after the announcement in deals, like
[13:28] this shareholders. If the selling Bank often do get
[13:32] paid something, not necessarily because their shares have any
[13:36] significant value, but because the deal is technically supposed
[13:40] to be voluntary. And it's difficult for the board
[13:43] of directors, of the selling company to announce that they
[13:46] negotiated the best possible price for shareholders.
[13:51] And got nothing for them. Not even a Toblerone.
[13:55] Okay, so let's go over the 81 Bond.
[13:59] What are they? And is what happened to
[14:01] bondholders fare? Well, in the wake of the credit
[14:05] crunch Regulators wanted to transfer more of the risk of a
[14:09] systematic bank. Failure away from depositors and
[14:12] taxpayers and onto bondholders issuing Securities.
[14:17] Like these was seen as a way of strengthening bank balance
[14:21] sheets and reducing the need for taxpayer-funded bailouts in the
[14:25] future. The way these bonds work is that
[14:29] their Perpetual bonds would have fixed face value, and they make
[14:33] regular interest payments being perpetuities.
[14:37] The bank doesn't have to pay back the principal amount ever.
[14:41] But they can after five years and they generally do, if the
[14:46] bank's common Equity Tier 1 Capital ratio ever fall.
[14:50] Falls below seven percent, then the 81 bond gets written down to
[14:55] zero it disappears. And this improves the balance
[14:59] sheet of the bank. As a big chunk of dead has just
[15:02] vaporized now. 81 bonds, don't all work this way, some convert
[15:08] into common stock. When the trigger is hit, others
[15:11] are temporarily written down and stop paying interest when the
[15:15] trigger is hit, but they can bounce back.
[15:18] If the equity recovers Each contract, though is different,
[15:24] some investors feel that these bonds should have been senior to
[15:27] equity, but they're just not, it's right there in their name
[15:32] 7%. CET, one trigger right down, 81
[15:36] bonds, that name means that if the bank's common Equity, Tier 1
[15:41] Capital ratio ever Falls below 7%.
[15:45] The bonds are written down, it's written in the bond prospectus
[15:49] to Which can be easily found on the Credit Suisse website.
[15:54] This structure is not been hidden in any way.
[15:57] Some investors just chose to ignore it.
[16:01] I have a slide that I've taken from a presentation on credit,
[16:05] suisse's website, describing their capital structure and you
[16:09] can see the low trigger. 80 ones are lower in the capital
[16:13] structure than Equity capital is.
[16:17] Now, there's not just is automatic trigger.
[16:19] That writes the It's down to zero.
[16:22] These particular bonds can also be zeroed by the regulator once
[16:26] again. This is not the case for all 81
[16:30] bonds but it is the case for these bonds Credit, Suisse
[16:34] issued an 81 bond with a yield of 9.75% last year, when rates
[16:41] were a lot lower than they are right now and that 9.75% coupon
[16:47] compensates investors for the risk that they're taking.
[16:50] And buying a bond like this. If these Bonds were the same as
[16:54] regular Credit Suisse bonds, they would have had much lower
[16:58] yields. The bonds documentation does
[17:02] state that the Swiss Regulators may not be required to follow
[17:06] any order of priority, which means amongst other things that
[17:10] the notes could be cancelled in whole or in part prior to the
[17:15] cancellation of any or all of Credit, Suisse groups Equity
[17:19] Capital the Spectres included a clause saying that the bonds
[17:24] could be written down in a viability event which can
[17:27] include a situation where the bank has received an
[17:31] irrevocable. Commitment of extraordinary
[17:34] support from the public sector, some of the owners of these
[17:38] bonds or similar ones may have been Senior Management and
[17:42] employees at Credit. Suisse in the wake of the
[17:46] financial crisis, Regulators pushed Banks to better.
[17:49] Align, Pay with risk-taking big cash bonuses, they felt
[17:54] encouraged Traders and Executives to make big bets
[17:58] without any regard for the long-term consequences Credit.
[18:03] Suisse paid a significant portion of Bankers bonuses in
[18:07] this type of bond. Tying the money up for a number
[18:11] of years before vested putting Traders and management on the
[18:16] hook for any catastrophic failure of the bank that might
[18:20] occur. We don't yet know if the
[18:23] employee Bonds were zeroed are not during this transaction.
[18:27] It hasn't been discussed but it would be pretty controversial.
[18:31] If bondholders got zeroed and the employees did not, I think
[18:35] it's fair to Guess that they probably did.
[18:39] I'm sure that this will all come out over the next few days in
[18:42] the news, the situation at Credit, Suisse fulfilled, many
[18:46] of the regulator's Ambitions about 17 billion In dollars in
[18:51] 81, Bonds were wiped out as part of the sale to UBS.
[18:56] Essentially reducing the debt burden on the firm's new owner,
[19:01] UBS and possibly hitting risk-taking employees and bond
[19:05] investors, who willingly bought these Securities during the
[19:10] credit crunch, bondholders were protected from losses at all
[19:13] costs. As Regulators worried, that Bond
[19:16] investors being wiped out could cause Contagion This was
[19:21] particularly controversial in Ireland where the government
[19:25] guaranteed all buying bondholders at the taxpayers
[19:29] expense, if bondholders can never be allowed to lose it,
[19:34] leads to the question. Why do they get paid a credit
[19:37] spread, if there's no actual risk of loss?
[19:41] The real controversy around the decision, relates to the fact
[19:45] that Bond holders were treated more harshly than shareholders.
[19:49] This is rippled across Is the broader 260 billion dollar 81
[19:54] market and is the biggest test to date of a regulatory
[19:58] framework that has until now been mostly untested other
[20:03] Regulators, including the European Central Bank have over
[20:07] the last few days stressed that they would not follow, and would
[20:11] not have followed the Swiss method in resolving a failing
[20:15] Bank in their jurisdiction. The bond market Jitters led the
[20:20] Are of the single resolution board the body in charge of
[20:24] shutting down failed banks in Europe, along with the European
[20:28] banking Authority, and the European Central Bank.
[20:31] To put out a statement stressing.
[20:34] The common equity instruments would continue to be the first
[20:37] ones to absorb losses would 81 bonds being written down only
[20:42] afterwards. The bank of England made a
[20:46] similar announcement as well. Swiss investors have announced
[20:50] that that they are considering legal action over the
[20:53] government's, use of emergency measures that meant
[20:57] shareholders, did not get to vote on the merger transaction.
[21:02] Ethos Foundation, which speaks on behalf of Pension funds and
[21:06] other institutional investors that own up to five percent of
[21:10] both Banks said that the Takeover was a huge waste for
[21:15] the shareholders and the Swiss economy.
[21:18] So other than some Credit Suisse Kid is who will have been
[21:22] partially paid with these bones, who else owned them?
[21:26] Well retail investors typically don't own bonds like these other
[21:30] than possibly through a fund they may have invested in
[21:34] retail. Investors are prohibited from
[21:36] buying bonds like these in many jurisdictions like the UK as
[21:40] they would be unlikely to understand the risks Pimco
[21:45] Invesco and Legg Mason are amongst the top holders of
[21:49] credit suisse's. A 81 bonds according to
[21:52] Bloomberg data. The financial times reports that
[21:56] this type of debt is quite popular with investors in Asia
[22:01] who appreciated the brand names of the issuers and the yields
[22:05] available the Credit Suisse Bond issued last year paying a 9.75%
[22:11] coupon was particularly popular with these investors, the Ft
[22:16] reports that many investors in Asia.
[22:19] Both the 81 Using leverage our with borrowed money and we're
[22:24] receiving margin calls on Monday Asian Private Bank lines
[22:29] reportedly LED 81 Bond selling this week where some Panic
[22:34] sellers push down. 80 ones issued by banks in Asia by
[22:39] between two and ten points depending on the country.
[22:43] Thanks for tuning in for today's podcast, if you enjoyed it, tell
[22:47] some of your friends about it because that's how podcasts.
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[22:53] write a review on your favorite podcasting app, have a great day
[22:58] and talk to you again soon. Bye.
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