The dollar-denominated notes will be permanently written down if UBS’s core Tier 1 capital falls below 5 percent or if the bank reaches a point where it would require a bailout to avoid collapsing, according to two people with knowledge of the deal, who declined to be identified before it’s completed. The bonds, which mature in February 2022 and may yield about 7.5 percent, will switch to a floating interest rate if the bank doesn’t redeem them in 2017, the people said.
“The deal looks like it’s aimed at Asian retail,” said John Raymond, an analyst at research firm CreditSights Inc. in London. “That seems to be the place to go these days to find wealthy people willing to invest in banks.”
Swiss authorities are insisting the nation’s biggest banks hold about twice as much capital as demanded under the international Basel III rules after the government was forced to put up 6 billion francs ($6.5 billion) in 2008 to help UBS spin off toxic assets. Credit Suisse Group AG (CSGN), the country’s second- largest lender, and Rabobank Groep NV of the Netherlands have also sold similar contingent securities designed to inflict losses on investors when capital buffers deteriorate.
A UBS spokesman didn’t immediately respond to a request for comment.
Zurich-based UBS posted an operating loss of 25.4 billion francs the year it offloaded the toxic assets to a fund set up by the central bank, a record for a Swiss company.
Swiss regulators are forcing the country’s banks to issue loss-absorbing securities including equity and bonds equivalent to 19 percent of assets weighted by risk and have given them until 2019 to do so.
The banks must have a so-called common equity Tier 1 ratio of at least 10 percent. They also have to hold two sets of loss- absorbing bonds, one -- equivalent to 3 percent of assets --that triggers when the Tier 1 ratio falls below 7 percent and another, covering 6 percent of assets, that triggers at a level of 5 percent.
UBS plans to issue only low-trigger bonds, opting to hold common equity instead of the high-trigger notes, according to Chief Financial Officer Tom Naratil.
A year ago, Credit Suisse issued $2 billion of so-called high-trigger buffer capital notes, due 2041 and callable in August 2016, that convert into equity if capital drops below 7 percent.
BNP Paribas SA, Commerzbank AG, Deutsche Bank AG and Societe Generale SA are managing UBS’s bond with the Swiss bank.