ZURICH (Reuters) - UBS UBSN.VX plans to sell more loss-absorbing bonds to meet tougher bank capital rules after the Swiss bank tested investor appetite for these new instruments with an initial $2 billion deal last week.
The new bonds are designed to help bolster the bank in tough times by absorbing losses. Their value can be written down if the bank’s common equity Tier 1 ratio - a measure of financial strength - falls below 5 percent.
UBS’s deal attracted $5.5 billion of demand from investors, which UBS said included private banks, long-only asset managers, hedge funds and banks investing for their own portfolios, in Asia and Europe.
The bank has maintained it is happy with the issue’s reception, but the take-up highlights that UBS has struggled to make the issue attractive to the big institutional investors the bank will have to tap if it is to sell these bonds in bulk.
It needs to sell roughly $16 billion in total of capital instruments, measured by its target for risk-weighted assets, to meet new capital rules.
“(The) deal marks the beginning of an issuance program as we build our loss-absorbing capital base to meet FINMA and the Basel Committee requirements for systemically important banks well in advance of the regulatory deadlines,” UBS’s financial head Tom Naratil said.
The bank is weighing issues in other regions and currencies for upcoming issues, which are likely to exceed $1 billion in size, he said.
But institutional investors are concerned that the loss-absorption features of these bonds potentially put them behind equity investors in creditor rankings.
“From an investor point of view, there is no option, no potential recovery. You end up being subordinated to the equity,” said Roger Doig, credit analyst at Schroders.
UBS’s issue comes one year after Credit Suisse CSGN.VX issued 6 billion Swiss francs ($6.6 billion) in so-called contingent convertible bonds, or CoCos, to existing shareholders and a further $2 billion of CoCos publicly. These bonds aim to absorb losses by converting to equity under certain conditions.
These new types of loss-absorbing bonds are a response to tough capital rules laid out by Swiss financial regulator FINMA after the financial crisis.
Unlike Credit Suisse’s bonds, UBS’s won’t convert to shares if the trigger is hit, reflecting the bank’s desire not to dilute shareholders following repeated cash calls as it struggled under the weight of more than $50 billion in mortgage-writedowns during the subprime crisis.
UBS’s 10-year notes sold last week pay a coupon of 7.25 percent, and the loss absorption trigger is set at a 5 percent common equity ratio.
That means the bonds would be written down permanently if the bank’s common equity Tier 1 ratio falls below 5 percent or if the bank is considered non-viable.
The Swiss regulator can trigger non-viability if it sees an impending collapse or bankruptcy of the bank.
Ratings agency Fitch assigned the notes a BBB-rating.
During the financial crisis, UBS accepted a government-backed rescue package in October 2008. Credit Suisse didn’t take state aid and raised capital privately.
($1 = 0.9107 Swiss francs)
Reporting By Katharina Bart. Additional reporting by Helene Durand. Editing by Mark Potter and Jane Merriman