Traders of bank bonds are no longer penalizing UBS Group AG for Swiss risk. That’s opportune as the country’s largest lender considers a new issue of additional tier 1 notes.
(Bloomberg) — Traders of bank bonds are no longer penalizing UBS Group AG for Swiss risk. That’s opportune as the country’s largest lender considers a new issue of additional tier 1 notes.
UBS, which acquired Credit Suisse in a government-brokered rescue that left investors in Credit Suisse’s AT1s with $17 billion of worthless notes, saw its risk premium soar to 450 basis points relative to non-Swiss issuers.
Six months later that penalty has nearly vanished as confidence returns for AT1 notes in general, and UBS in particular. Now, the extra yield on UBS’s AT1 versus non-Swiss lenders stands at just 25 basis points, according to data compiled by Bloomberg.
“There are expectations that Swiss authorities will not repeat what they did to CS AT1 holders,” said Joost Beaumont, head of bank research at ABN Amro Bank NV. “Investors are being on their qui vive now, reading the prospectus from A to Z and being better informed more generally.”
A general recovery in the AT1 market and the “good deal” that UBS got with Credit Suisse are also helping to squeeze the gap versus non-Swiss lenders, according to Beaumont.
A spokesperson at UBS declined to comment.
Issuance of new additional tier 1 notes by UBS may happen when “appropriate,” chief executive officer Sergio Ermotti told analysts in August. That followed a Bloomberg report that UBS was considering its first AT1 sale since March’s meltdown before the first optional call dates of two notes totalling $3 billion come due.
Traders were initially alarmed by Swiss authorities’ handling of the Credit Suisse acquisition, which included a total writedown for AT1s while shareholders maintained some value. Officials in other jurisdictions were quick to distance themselves from the Swiss example.
To be sure, it’s not certain that near parity with competing banks’ AT1 yields will be enough to spur new issuance for UBS.
The integration of Credit Suisse into UBS may not go as smoothly as expected, although that might be offset by safeguards from the Swiss government and profits that have received a record boost from the bargain acquisition.
A dramatic selloff in government bonds that’s sparked volatility in riskier assets, including AT1s, may give investors pause, according to Sebastien Barthelemi, head of credit research at Kepler Cheuvreux.
“Stabilization of UBS is expected,” Barthelemi said. “However, stabilization of interest rates is needed before investors are ready to buy AT1s again.”
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