UBS Plans SRT Deal Out of Program Inherited From Credit Suisse

(Bloomberg) — UBS Group AG is sounding out investors for a potential significant risk transfer, according to people familiar with the matter, as the banking giant explores ways to mitigate the impact of higher capital requirements proposed by the Swiss government.

Zurich-based UBS is considering an SRT tied to CHF2 billion ($2.5 billion) of loans, according to people familiar with the matter, who asked not to be identified as the details are private. The SRT may be equivalent to about 3% of the reference portfolio, they added.

Since the potential sale is in its early stages, the terms and size could change, said the people. The transaction may be issued through J-Elvetia, the people said, referring to one of the vehicles through which Credit Suisse Group AG issued SRT notes before UBS took over the bank. As part of the integration, UBS inherited a list of legal issues, including a mortgage-related case that resulted in a $300 million payment announced Monday.

A spokesperson for UBS declined to comment.

SRTs allow banks to insure loans against default. The transactions are frequently issued in the form of credit-linked notes to pension, sovereign wealth and hedge funds, allowing the issuer to unlock capital they would otherwise use to meet regulatory requirements. Typically, a lender obtains default protection for between 5% and 15% of the loans’ value.

The Swiss government has proposed banking reforms that could add as much as $26 billion to UBS’ existing capital demands. The overhaul, which is aimed at preventing another crisis like the collapse of Credit Suisse, could leave UBS with less room to hand profits back to shareholders and limited room to grow.

“We use SRTs to manage risk and also as a collateral effect of helping and optimizing risk-weighted assets and capital,” said UBS Chief Executive Officer Sergio Ermotti in a press conference last week. “We have a fairly defined framework of how we want to use them in respect of not only the size but also the maturity of SRTs and the counterparties we pick for doing these kind of transactions.”

Separately, UBS last week raised $2 billion of Additional Tier 1 bonds — another type of security that banks use to bolster solvency ratios — at a time when cash-flush investors are showing strong demand for the risky form of debt.

The global SRT market is expected to expand 11% annually on average over the next two years, according to a Bloomberg Intelligence survey released in June. Natixis SA, Caixabank SA, Aareal Bank AG, Erste Group Bank AG, Standard Chartered Plc and ING Groep NV are among the banks currently discussing or finalizing such deals.

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