Book Closes On Credit Suisse After 167 Years

Going once, going twice, sold! For a princely CHF0.76.

Credit Suisse was forced into the arms of rival UBS on Sunday. Or maybe I should say UBS was forced to embrace Credit Suisse. Both descriptions were probably accurate.

The final terms of a deal cobbled together over a hectic 48 hours found UBS paying three times more for Credit Suisse than it offered initially, but still far below Credit Suisse’s market value as of last week’s close, which was itself well below the prior week’s close, and so on.

Credit Suisse shareholders will get one UBS share for every 22.48 shares held in the all-stock transaction, worth CHF3 billion. UBS reportedly offered just a third of that initially, a proposal Credit Suisse was reluctant to accept even under the extraordinarily onerous circumstances.

The Swiss government, fearing the deal might fall through, mulled nationalizing Credit Suisse as a last resort+.

The sale punctuated a downward spiral for the bank, where a last ditch turnaround effort was ironically undercut by the restructuring plan’s biggest financial backer. An apparently errant remark by Saudi National Bank chief Ammar Al Khudairy set in motion a chain reaction which, within 72 hours, sealed the 167-year-old Zurich-based institution’s fate.

The turnaround plan, announced in late October, was instituted following a series of missteps and mini-crises, including, most recently, the Archegos blow up and the Greensill debacle. Credit Suisse suffered an estimated $80 billion in outflows in early October when a social media frenzy sparked what, at the time, were unfounded concerns about the bank’s solvency. For Q4 as a whole, the exodus from Credit Suisse came to more than $100 billion.

The situation subsequently stabilized, but never inflected decisively for the better, and reports indicated+ outflows were running at an $11 billion daily pace during last week’s panic.

UBS Chairman Colm Kelleher didn’t mince words on Sunday. “This acquisition is attractive for UBS shareholders but, let us be clear, as far as Credit Suisse is concerned, this is an emergency rescue,” Kelleher said, announcing the deal, which UBS was very keen to insist comes with adequate downside protection equivalent to CHF25 billion “to support marks, purchase price adjustments and restructuring costs, and additional 50% downside protection on non-core assets.”

The bank expects the deal to be accretive within four years, and said UBS remains capitalized “well above” its target of 13%. UBS has access to CHF100 billion in SNB liquidity. The combined entity will have more than $5 trillion of invested assets.

Tellingly, perhaps, what UBS described as an acquisition Credit Suisse described as a “merger.” “UBS will be the surviving entity,” a forlorn, ad hoc press release read.

Both banks made it clear they were given little choice in the matter. Credit Suisse said the SNB, Finma and the Swiss Federal Department of Finance “asked” the banks to merge, and UBS described the discussions as “initiated jointly” by the same government entities. The Swiss government said it’ll take on up to CHF9 billion in prospective losses “arising from certain assets that UBS takes over as part of the transaction,” in the event losses exceed CHF5 billion.

As initially reported, the Swiss government did away with any requirements around a shareholder vote. “The transaction is not subject to shareholder approval,” UBS said, flatly. Credit Suisse cited an “emergency ordinance” issued by the Swiss Federal Council.

I expect it’ll be a while before the financial media has a chance to ask everyone affected for their opinion, and then sort out how those stakeholders will ultimately be impacted. I personally doubt even the banks are sure about that at this juncture. Credit Suisse said Sunday it’s going to “continue to operate in the ordinary course of business and implement its restructuring measures in collaboration with UBS.”

Finma wrote Credit Suisse’s additional Tier 1 capital down to zero. Some bondholders will be wiped out here, and that may trigger its own mini-crisis, depending on how loudly it reverberates.

Kelleher will be Chair of the combined company and UBS CEO Ralph Hamers will remain in his position. Hamers on Sunday said he’s looking “forward to welcoming our new clients and colleagues across the world in the coming weeks.”

I don’t see much use in sugarcoating things: This marks an unceremonious end for Credit Suisse. It’s a dubious denouement, as I put it early Sunday. But the alternatives were probably worse. Chairman Axel Lehmann, who just days ago said Swiss government intervention “isn’t a topic,” on Sunday conceded the merger was “the best available outcome” considering “extraordinary and unprecedented circumstances.”

Certainly the outcome is “extraordinary.” Although Wall Street has generally considered Credit Suisse to be in a state of pseudo-crisis for years, the speed at which things unraveled was stunning. Of course, that’s why crises of confidence are so perilous — they’re virtually impossible to arrest beyond a certain threshold and Swiss authorities plainly believed that threshold was crossed last week.

Commenting Sunday during a press conference, SNB chief Thomas Jordan said, “It was indispensable that we acted quickly and find a solution as quickly as possible.”