In April 2021, Switzerland’s two largest banks, UBS Group AG and Credit Suisse Group AG, announced plans to merge in a deal that would create a $90 billion financial powerhouse. UBS, a global investment bank, has long been Switzerland’s largest bank. Credit Suisse, a well-known private banking and asset management firm, was the country’s second largest lender.
This planned union has elicited mixed reactions from both the financial community and the bondholders of the two companies. On one hand, it may appear to create a powerhouse of capital, but on the other hand, it could create uncertainty among bondholders. In this article, we will discuss why the UBS takeover of Credit Suisse is bad for bondholders.
Overview of the UBS/Credit Suisse Merger
The merger of UBS and Credit Suisse would create a $90 billion powerhouse in wealth management, private banking and asset management. The combined bank would have nearly $2 trillion in assets under management, making it the third-largest wealth manager in the world. The merger is part of a larger effort to restructure the banking industry in Switzerland in order to bring down costs and remain competitive in a highly regulated industry. UBS and Credit Suisse have also cited their potential to save as much as $4 billion by eliminating redundancies and combining resources.
What Bondholders Need to Know
The UBS/Credit Suisse merger is being hailed as a monumental moment for the Swiss banking industry. However, investors and bondholders of both banks need to be aware of the potential risks associated with the merger. Bondholders will want to pay special attention to the following points:
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Risk of Default: This means that bondholders who were previously invested in UBS or Credit Suisse now have the chance of their bond being defaulted on. When two companies merge, they often need to restructure their debt in order to be more efficient, which can lead to defaults.
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Credit Ratings Downgrade: The merger of UBS and Credit Suisse may also lead to a downgrade of the combined company’s credit rating, which could make it harder for bondholders to receive their payments or get attractive interest rates.
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Loss of Diversification: Bondholders who have invested in both UBS and Credit Suisse will lose the diversification of their holdings. As a result, they may experience greater volatility in their investments.
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Higher Capital Requirements: UBS and Credit Suisse will have to meet some tough capital requirements established by the Swiss Financial Market Supervisory Authority (FINMA) during their merger. This could lead to higher costs for bondholders, as the banks are increasingly likely to tap into their bondholders for capital in order to meet the added requirements.
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Loss of Liquidity: If two companies merge, there is a risk of the combined company not being able to raise funds as easily as it previously could. This could dry up liquidity and make it more difficult for bondholders to sell their bonds.
The UBS/Credit Suisse merger has been well-received by some and seen as a monumental moment for Swiss banking. However, it is important for bondholders to understand the potential risks associated with this merger. From the potential for defaults to the loss of diversification and liquidity, this merger says bad things for bondholders. Despite the potential of the combined company to be an industry leader, bondholders should know there is no guarantee of success and it may be wise to move cautiously.
