UBS, Credit Suisse Can Use Low-Trigger Tier 1 for Capitalby
Bonds Eligible Until Call Dates for `Going-Concern' Capital
Tier 2 CoCos Only Eligible for `Gone Concern' From 2020: Finma
The Swiss banks have issued billions of francs of subordinated convertible bonds that the government said Wednesday evening would not qualify for the "going-concern" element of the country’s tougher too-big-to-fail rules. So-called CoCos may be written off or converted into equity if a bank is heading toward failure.
The banks have until the end of 2019 to comply with the rules, the government said. UBS, which had pressed the government for easier terms, described the requirements as “by far the most demanding in the world.”
Investors have been seeking more details about their implications for CoCos, with some warning the banks might call in the disqualified debt early. That could mean a loss for investors who paid a higher premium for the bonds with a view to holding them to term. UBS had alluded to its right to pay off some debt at call dates in a written response to the Swiss decision.
At present, Switzerland allows its two biggest banks to count both Tier 2 CoCos and low-trigger Additional Tier 1 notes in calculating their leverage ratio, a blunt measure of bank capital relative to assets not weighted for risk. Interest payments on the notes can be halted and holders forced to accept losses if the ratio dips below pre-defined levels.
Low-trigger AT1 notes will continue to be eligible until their call dates, thanks to grandfather clauses, Finma spokesman Vinzenz Mathys said by phone on Friday. The banks have about 7.2 billion francs ($7.4 billion) of these kinds of CoCos, CreditSights Ltd. estimates. The last of these fall due in 2025, according to data compiled by Bloomberg.
From 2020, Tier 2 CoCos will no longer contribute to "going concern" capital, the Finma spokesman said. The rules are still under discussion and are not final, he said in a subsequent call Friday. The banks have about 17.4 billion francs of the less-subordinated Tier 2 CoCos, according to CreditSights Ltd.
Credit Suisse’s 1.25 billion euros of Tier 2 notes with a call date in September 2020 reversed about half the day’s losses after the news, rising about 1.7 cents to 110.4 cents. If Tier 2 notes are eligible as going concern capital up to 2020, then valuations "which have been under pressure due to the short-term risk of a Reg Par Call should recover," JPMorgan Chase & Co. analyst Roberto Henriques wrote to clients Friday.
The market had taken a wait-and-see approach in the days since the Swiss decision. The meaning of the grandfather clause had been "rather vague," RBC Europe analysts led by Carlo Mareels wrote in a note to clients on Friday.
The possibility of a regulatory call may allow the banks to redeem the notes at a favorable lower price and then issue cheaper senior debt, Morgan Stanley analysts led by Jackie Ineke said in a note Friday. Credit Suisse has used this option in the past, analysts at Barclays Plc said earlier this week.
The leverage ratio gained importance for regulators in the United States and Europe after several banks, including UBS, were bailed out in the financial crisis. It seeks to quantify the losses a bank can sustain before its shareholders are wiped out.
The rule is designed to protect taxpayers from having to bail out banks so large that their failure poses a threat to the whole economy. UBS and Credit Suisse have assets of 1.83 trillion francs combined, about three times Switzerland’s gross domestic product.