UBS’s $2 Billion of Contingent Capital Notes Fall After Sale

UBS AG (UBSN)’s $2 billion of contingent capital notes, which help meet regulator demands that lenders strengthen themselves against losses, tumbled since Switzerland’s biggest bank sold the notes two days ago.

The 10-year securities, priced at par to yield 7.25 percent, were quoted at 98.75 cents on the dollar as of 4:42 p.m. in London after falling to as low as 97 cents on Feb. 16, according to Royal Bank of Scotland Group Plc prices on Bloomberg. The bonds will be written off should the lender’s core Tier 1 capital fall below 5 percent, or the bank faces a bailout.

UBS followed Credit Suisse Group AG and Rabobank Groep NV in selling contingent securities which inflict losses on investors when capital buffers weaken. The Zurich-based bank issued the notes on the day Moody’s Investors Service said it may cut the lender’s credit rating by as many as three levels.

“They were priced for retail, rather than the institutional market where most investors seem to have thought them very tight,” said John Raymond, an analyst at research firm CreditSights Inc. in London. “It seems to be partly because of the big Moody’s review.”

UBS spokeswoman Stephanie Aneto in London declined to comment on the performance of the securities.

Moody’s is reviewing 17 banks and securities firms which have global capital markets operations. Capital markets businesses “are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions,” Moody’s said.

Subordinated bonds fell across the market yesterday, the day after Moody’s said it was putting the firms on review, according to Bank of America Merrill Lynch index data. The extra yield investors demand to hold financial subordinated debt rather than government securities surged 19 basis points to 714. Yields on the notes climbed to 8.65 percent, the data show.

To contact the reporter on this story: Ben Martin in London at bmartin38@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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