Global investment bank Credit Suisse announced that its debt of 17.24 billion US dollars would be written off, abiding by the regulations of the Swiss authorities.
The debt worth 16 billion Swiss francs belongs to the Additional Tier 1 and the move to write it down to zero is a part of the Swiss rescue merger with UBS, a multinational investment bank headquartered in Switzerland. However, this move resulted in outraging the bondholders.
Jerome Legras, the Head of Research at Axiom Alternative Investments, an investor in Credit Suisse’s AT1 debt, said that it was stunning and hard to understand how they could reverse the hierarchy between AT1 holders and shareholders.
Ralph Hamers, the CEO of UBS, in a session with analysts, said that the decision to write down the AT1 bonds to zero was taken by FINMA, and therefore it would not pose a liability for the bank.
Michael Ashley Schulman, the Chief Investment Officer and Partner at Running Point Capital Advisors said that it was going to make the AT1 bonds more expensive for all the other banks going forward because now everyone else was going to see the extra risk.
Swiss regulator, FINMA stated that the now-made decision would bolster the bank’s capital. The statement continued that the move reflects authorities’ desire to see private investors share the pain from the troubles at Credit Suisse.
Marlene Amstad, the Chair of FINMA, said that the organization had gotten stuck to the country’s too-big-to-fail banking framework in making the decision.
Axel Lehmann, the Chairman of Credit Suisse, opined that the move was a clear turning point. He said that the merger was a historic, sad, and very challenging day for both Credit Suisse, and Switzerland, and the global financial markets.
The merger is set in a way to currently focus on the future for the time being and specifically on the 50,000 Credit Suisse employees. 17,000 of the employees are in Switzerland.
Sticking with the already existing banking framework means that the AT1 bondholders appear to be left with nothing while shareholders who are seated below bonds in the priority ladder for repayment in a bankruptcy process. It has also been decided that the shareholders would receive 3.23 billion US dollars under the UBS deal.
Alain Berset, the President of the Swiss Confederation, the official name of Switzerland, announced that the deal was one of the great breadths for the stability of international finance. He continued by saying that the country and the global financial system would suffer immeasurable consequences if Credit Suisse collapsed out of control.
Berset added that the Federal Council has been discussing the conditions of Credit Suisse which has been in distress for a long time and the reason for which it has not been able to overcome it even after the allocation of a considerable amount of time.
The merger was passed by a governing body, known as the seven-membered Executive Branch of Switzerland, which includes the President as one of its members. The merger went through without the approval of the shareholders as it was passed as an emergency ordinance.
Karin Keller-Sutter, the Finance Minister of the Swiss Confederation said that the council has expressed regret that the bank that served as one of the model institutions in Switzerland had to face this situation at all.
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Max Georgious, a Third Bridge analyst, said the merger announcement comes as one of the most significant days in the European banking sector since 2008, and it has the potential to notably impact the industry repercussions. He added that these events could alter the course of European banking and also the wealth management industry from a general perspective.
The Chairman of UBS, Colm Kelleher, supported the merger by saying that it could bring enormous opportunities. He continued that the conservative risk culture of UBS coils acts as a subtle swipe at Credit Suisse’s reputation for more swashbuckling, aggressive gambles in search of bigger returns, in the present scenario. He added that the union of the two banks would create a wealth manager with over 5 trillion US dollars in total invested assets.
As per the reports from the UBS officials, it was known that there was an underlying plan to sell off parts of Credit Suisse. An alternate plan would be to reduce the size of the bank in the upcoming months and financial quarters.
Christine Lagarde, the President of the European Central Bank praised the action by referring to it as a swift action by the Swiss officials and said that it was a high need of time and instrumental for restoring orderly market conditions and ensuring financial stability.
Lagarde continued that the banks have been in a completely different position since 2008, and a minor portion of its responsibility goes to the stringent regulations that the government had implemented.
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