UBS plans to issue two U.S. dollar-denominated hybrid bonds in a context marked by capital requirements reform in Switzerland and the fallout from the collapse of Credit Suisse, Bloomberg reports. These financial instruments, classified as AT1 bonds, are part of the strategy of Switzerland’s largest banking company to adapt to the country’s new regulatory environment and respond to recent court decisions to pay off subordinated debt following the disappearance of its main competitor.
Bloomberg said the company plans to issue one of those bonds with a repayment date in 2031 and an interest rate of 7.125%, and the other with a maturity date five years later and an interest rate of 7.5%. The move would be the first of its kind since the Swiss Parliament opened debate on changes to capital requirements for banks. The initiative comes after the Swiss Federal Administrative Court partially overturned regulator FINMA’s decision allowing the redemption of 16,500 million Swiss francs (17,773 million euros) in 2023 of AT1 securities or “CoCos” from Credit Suisse.
The controversy over the write-off of these instruments arose after UBS’s takeover of Credit Suisse, a process which the company said required extraordinary measures to ensure the financial viability and stability of the Swiss banking system. According to a publication by Bloomberg, UBS claims that the devaluation of the AT1 bonds during the rescue operation was in accordance with the contractual terms and the current legal framework, which is why it has appealed against the decision to revoke FINMA.
In December, a group of Swiss lawmakers introduced a series of proposals aimed at allowing UBS to use AT1 bonds instead of equity to support its subsidiaries outside Switzerland. This approach aims to mitigate the potential negative impact of a possible tightening of capital standards being considered in Parliament. According to sources cited by Bloomberg, this solution would be particularly relevant in the new regulatory scenario, as AT1 bonds act as a safety cushion in the event of financial difficulties while allowing the maintenance of the solvency levels required by regulators.
Regarding the legal proceedings related to the “CoCos” of Credit Suisse, UBS initiated administrative proceedings in October last year to challenge the decision of the Federal Court on the grounds that the redemption of these securities constituted an inherent part of the rescue strategy and was carried out in accordance with the clauses set out in the contracts. The legal conflict over the write-off of AT1 caused concern in the markets and among investors specializing in hybrid instruments because of its impact on the value of this type of asset following the collapse of the acquired company.
UBS’s intention to issue new AT1 bonds comes in a climate of ongoing regulatory and legal tensions, where the outcome of disputes over the treatment of subordinated debt could impact capitalization strategies and the perception of the Swiss banking sector in international markets. According to Bloomberg, the company’s decision to enter the market with these new securities is also intended to demonstrate its ability to adapt to evolving regulations and strengthen its position as a leader in the Swiss financial system.
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