UBS Sells 2 Billion Euros of Contingent Bonds as Debt Risk Falls

UBS AG (UBSN) sold 2 billion euros ($2.7 billion) of contingent capital bonds as the cost of insuring against losses on financial debt fell for a third day.

The 12-year notes from Switzerland’s biggest bank will be written off should the lender’s Tier 1 capital drop below 5 percent, according to a person familiar with the deal. The Markit iTraxx Subordinated Financial Index of credit-default swaps on 25 European banks and insurers declined nine basis points to 145 basis points at 4:45 p.m. in London.

Issuance of contingent securities is increasing as banks seek to align capital structures with new regulatory requirements and fixed-income investors grow accustomed to the idea that their bonds could face losses in a crisis. The junior notes can be written off or convert to equity when a lender’s core capital ratio falls below a certain percentage of risk-weighted assets.

“These instruments provide very attractive yield from very strong issuers,” said Jeroen van den Broek, head of developed markets credit strategy at ING Groep NV in Amsterdam. “The trade is a welcome addition to the euro bank capital space.”

The bonds from Zurich-based UBS can’t be repaid for seven years and yield 340 basis points more than the benchmark mid-swap rate, according to the person familiar with the deal, who asked not to be identified because they’re not authorized to speak about it.

Photographer: Gianluca Colla/Bloomberg

A visitor enters UBS AG's headquarters in Zurich. Close

A visitor enters UBS AG's headquarters in Zurich.

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Photographer: Gianluca Colla/Bloomberg

A visitor enters UBS AG's headquarters in Zurich.

The average yield on contingent capital bonds in euros was 6.8 percent, according to Bank of America Merrill Lynch index data.

Banco Bilbao Vizcaya Argentaria SA is planning to sell bonds in euros that will convert to equity if its Tier 1 capital falls below 5.125 percent, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it.

To contact the reporter on this story: Abigail Moses in London at amoses5@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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