22 March 2023 UBS to buy arch-rival Credit Suisse in distressed purchase

UBS to buy arch-rival Credit Suisse in distressed purchase​

What do you need to know this week?

On Monday, the Swiss government pushed through the purchase of Credit Suisse by its fellow Swiss rival UBS in what is arguably the biggest upset to the global banking industry since the 2007-08 Global Financial Crisis (GFC), which saw the business divisions of giants like Lehman Brothers and Merrill Lynch subsumed into their rivals.

The purchase comes after the Swiss financial regulators appear to have lost confidence in the bulge bracket investment bank’s solvency position, despite the fact they had previously injected $54bn into the bank. Its shares collapsed by more than 60% since Friday before being suspended in advance of UBS’s acquisition.

The combined value of the post-merger entity, expected to be called UBS, will make it the largest private wealth bank in the world. Its investment banking and asset management divisions will also greatly grow in value and reshape the balance of banking power in the United States and Europe.

According to a press release prepared by UBS, Credit Suisse shareholders will receive 1 UBS share for every 22.48 shares they held in Credit Suisse, which is equivalent to CHF 0.76 per share (or $0.82 per share), which in aggregate amounts to approximately CHF 3bn ($3.2bn).

The deal has attracted the wrath of certain Credit Suisse bondholders that own $17bn of Additional Tier 1 (AT1) debt in the company because the merger effectively wipes out their position. AT1 bonds, which are unique to the banking industry, technically rank above equity shares when it comes to the order of priority, which is a fundamental rule of insolvency law that states creditors should always be repaid before shareholders. Despite this, Credit Suisse shareholders get shares in UBS whereas AT1 bondholders are wiped out.

Why is this important for your interviews?

This is as dramatic of a development as the collapse of SVB last week. It likewise signals that the global banking markets may be on more precarious footing than previously thought. Accordingly, it is important to keep track of these fast-moving affairs because of their wide-reaching impact.

The crux of the panic relates to investor uncertainty over the banking industry’s ability to weather sustained interest rate hikes, which central banks have been implementing since last year in an effort to control inflation. As in SVB’s case (and certain other smaller US banks), interest rate increases substantially devalued their loan portfolios, wiping out the net value of the bank’s assets and triggering a run on its deposits.

In Credit Suisse’s case, it has long been the proverbial runt of the bulge bracket banking litter, which also includes JP Morgan, Goldman Sachs, Morgan Stanley, Citi, Bank of America, Deutsche Bank, and UBS. It has been plagued by a series of recent scandals, including its role in the Greensill scandal, and its financial performance has languished relative to its competitors ever since it acquired First Boston in 1998. Investors may have simply taken out their anxieties regarding the banking industry generally on the weakest member of the world’s largest banks.

This also raises further questions over the efficacy of post-GFC financial regulation regimes. No doubt, financial regulators around the world will want to ensure market stability and restore confidence. As of Monday, the UK’s prime minister, Rishi Sunak, confirmed that the Bank of England is confident in the nation’s banking industry.

Other issues include competition concerns over the size of the two merged firms and the treatment of Credit Suisse’s bondholders.

How is this topic relevant to law firms?

As reported by The Lawyer on Monday, US firm Cleary Gottlieb is the principal legal adviser to Credit Suisse, supported by Sullivan & Cromwell and Walder Wyss.

Freshfields is advising UBS.