UBS AT1 Investors Get a Win After Swiss Put Reforms on Ice
(Bloomberg) — As UBS Group AG blasted the Swiss government’s plans on tougher banking rules, holders of its riskiest bonds celebrated thanks to one sentence in the announcement.
The Swiss lender said it strongly disagreed with the government’s plans, which would add billions of dollars to its capital requirements. But a fleeting reference to AT1s in the statement Wednesday gave investors cause for cheer: “The Federal Council has decided not to proceed with the proposed adjustments to AT1 capital instruments for the time being.”
“Bingo,” said Jackie Ineke, chief investment officer at Spring Investments SA. “No extra need for AT1 issuance, no profit test on coupons, no tweaks to call decisions, great [Common Equity Tier 1],” she said.
In response, UBS’s latest Additional Tier 1 dollar issue rose as much as 1 cent on the dollar, notching the biggest daily gain in two weeks, and the highest level in two months. The Swiss lender’s other AT1 bonds held those gains Thursday.
Previous proposals would have set tougher tests on whether Swiss banks could pay interest in those notes and when they could replace old bonds with new ones.
Ineke and her colleagues at Geneva-based Spring had been buying UBS bonds during the volatile days of the past few weeks on the view that there was little to fear from AT1 coupon tweaks. Still, “we didn’t expect ‘nothing’ on AT1s, as we’ve got.”
Representatives at UBS declined to comment.
The announcement this week was “maybe the best outcome for AT1 holders,” said Romain Miginiac, fund manager and head of research at Atlanticomnium SA. “More capital and no more AT1 coupon, and call, tail risk,” he said.
The extra requirements in the government’s plans focused on so-called CET1 capital, which relates mostly to common equity and retained earnings. For AT1s, the Swiss Federal Council said it “considers it more appropriate to await the international developments that are currently under way in this area.”
An international effort to potentially reform AT1s is ongoing, even though plans have, so far, been short on detail and have sown confusion among investors and analysts.
Previous Swiss proposals on changes to AT1s’ structure and what requirements they can fulfill had weighed on the UBS bonds in recent months. Late last year, Swiss lawmakers put forward recommendations that would allow UBS to use AT1 bonds instead of equity as capital backing for its foreign units, raising the prospect of higher supply of those risky notes.
What Bloomberg Intelligence Says…
“UBS’ AT1 and senior holdco bonds could tighten on the Swiss authorities’ proposals for higher capital requirements, though phase-in will be long (6-8 years) and the precise mix is still being debated.”
—— Jeroen Julius and Ruben Benavides, BI credit analysts
Click here to read the full report
UBS is one of the largest issuers of AT1 bonds in the world with more than $20 billion of those instruments outstanding, based on data compiled by Bloomberg.
(Adds UBS response in seventh paragraph, Bloomberg Intelligence report in 12th.)
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