The bank prefers “non-dilutive” contingent capital, Naratil told reporters on a conference call from Zurich today. That suggests UBS won’t follow Credit Suisse Group AG, the nation’s second-biggest bank, in issuing contingent convertible bonds that convert into shares when capital drops below a pre- defined level.
The first issue will probably be denominated in dollars and exceed $1 billion, Naratil said, adding that Zurich-based UBS will “soon” sound out potential co-lead managers and investors on the probable structure of the bonds.
Under the Swiss rules, UBS and Credit Suisse need to have at least 6 percent of risk-weighted assets in contingent capital that is triggered if common equity falls below a 5 percent threshold. The banks may also hold 3 percent of risk-weighted assets in contingent capital with a trigger if common equity drops below 7 percent. UBS has said it doesn’t plan to issue the latter type of capital, opting to hold common equity instead.
The bank’s common-equity ratio under fully-applied Basel 3 rules was 6.7 percent at the end of 2011, UBS reported today. The capital ratio under the so-called Basel 2.5 rules rose to 16 percent at the end of the year from 13.2 percent on Sept. 30 after UBS cut risk-weighted assets.
Credit Suisse CoCos
UBS said in November that by the end of 2012, it plans to have about 0.7 percent of risk-weighted assets, or about 2.4 billion Swiss francs ($2.6 billion), in contingent capital. This may increase to almost 5 billion francs by the end of 2013, according to slides presented at the bank’s investor day last November.
Credit Suisse last February agreed to sell $3.5 billion and 2.5 billion francs of contingent convertible bonds, known as CoCos, to existing shareholders in Qatar and Saudi Arabia in exchange for Tier 1 capital notes sold in 2008. The bonds, which would convert into shares if the bank’s Basel 3 common equity ratio falls below 7 percent, will be issued no earlier than October 2013. The bank then also sold $2 billion CoCos to public investors.
UBS is confident there would be demand for its bonds given its capital strength, Naratil said in an interview.
“There is certainly investor money for the better names in banking,” Naratil said. “If you look at the issuance tables and you see who’s been able to issue, it’s everyone who doesn’t need to go to the LTRO,” he said, referring to the European Central Bank’s three-year lending program.
UBS Chief Executive Officer Sergio Ermotti told analysts and journalists earlier today that the bank didn’t borrow from the ECB when the central bank awarded 489 billion euros ($645 billion) in 1,134-day loans on Dec. 21 to keep credit flowing to the economy. The bank’s funding and financial position didn’t require the bank to access the program, he said.
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