UBS marks new chapter for AT1 bonds with first since Credit Suisse deal

ZURICH, Nov 8 (Reuters) – UBS (UBSG.S) saw strong demand on Wednesday for its first Additional Tier 1 (AT1) bond sale since taking over Credit Suisse in March, in a further sign of confidence returning to risky bank debt after the Swiss rescue rocked the market.

The state-engineered merger led to a wipeout of $17 billion of Credit Suisse’s AT1 bonds. A surge in AT1 bond yields that followed raised concern about the future of an asset introduced after the 2008 financial crisis to act as shock absorbers if bank capital levels fell below a certain threshold.

The bond sale saw over $26 billion of investor demand, LSEG capital markets news service IFR reported.

UBS, Switzerland’s largest bank, said it would provide additional information when the bond offering was completed.

Its newest bonds are the first AT1 instruments UBS will sell that will convert into equity if its capital levels fall below a certain level, or a “viability event” such as receiving extraordinary government support, takes place, ratings agency S&P Global said. It assigned a ‘BB’ rating to the bonds.

The new feature needs approval at UBS’s next annual general meeting, S&P said, but would help prevent bondholders from being wiped out as they were during the Credit Suisse-UBS tie up.

“Their structure is very new and shows they listened to investors who were angry about the permanent write-down feature,” said Jerome Legras, head of research at Axiom Alternative Investments, who held Credit Suisse AT1 bonds before the March banking crisis.

The Credit Suisse AT1s wipeout spurned a number of claims against Switzerland’s financial regulator FINMA, which inverted the long-established seniority of bondholders over shareholders over the assets of a company in distress.

That dented sentiment in the key market for bank bonds and prompted regulators in Europe and Asia to reassure investors.

European banks have resumed fundraising in the AT1 market, but a UBS deal has been long awaited as a next step for its recovery.

The new AT1 bonds, U.S. dollar securities which UBS can redeem in five and 10 years, are offering yields of around 9.625% and 9.75% respectively, IFR said, down from around 10% when the sale started earlier on Wednesday.

Joost Beaumont, head of bank research at ABN AMRO, said the deal was a “pivotal” moment, giving investors an opportunity to push back against UBS if they were still disturbed by March’s writedown.

“It seems that markets, if this deal goes well, have moved (on),” he said.

UBS also said on Wednesday it intends to redeem the total outstanding on a 700 million Singapore dollar AT1 instrument on Nov. 28.

Shares in UBS were last up 0.9%, while the broader Swiss market was up 0.6% (.SSMI).

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