Photographer: Chris Ratcliffe/Bloomberg

UBS Seeking to Buy Back $16 Billion in Bonds Before Fed

UBS Group AG is seeking to buy back about $16 billion in bonds, partly to replace debt instruments that will no longer count toward capital under tougher rules.

The cash offer expires Dec. 15, one day before the U.S. Federal Reserve is expected to raise rates. The bank will book a charge from the transactions in the fourth quarter that won’t make a big dent in its capital cushions, it said in a statement Friday.

The buyback comes as new too-big-to-fail rules force lenders to issue more debt that regulators accept can take losses if they run into trouble. It’s also an opportunity to re-finance bonds issued several years ago before central bank easing curbed the high coupon payments demanded by investors. UBS is the third major bank in three weeks seeking to cut or swap its liabilities, following British lenders Royal Bank of Scotland Plc and Lloyds Banking Group Plc. 

The proposal comprises 17 issues of senior and subordinated debt and covered bonds, mostly denominated in dollars, pounds or euros. For almost all of them, the bank is offering a premium tied to the value of sovereign notes associated with the currency.

Carlo Mareels, a London-based credit analyst at Royal Bank of Canada, said the premiums for the pound and euro notes looked more generous than for the dollar bonds. 

“The offers amount to small premiums, and slightly bigger ones for the Tier 2 pound notes,” he said. “That could be attractive enough to want to exchange.”

New Co-Cos

The bank’s 250 million pounds ($378 million) of 6.375 percent junior notes due in 2024 rose 2 pence to 114 pence early Friday. Its 900 million pounds of 6.625 senior unsecured bonds, which were issued in April 2008, rose 0.6 pence to 112 pence. Most of the other notes were little changed.

The offer includes $3.55 billion of junior, Tier 2 notes that will lose their capital qualification from 2019 under the tougher Swiss rules, the bank said. It didn’t give a motive for repurchasing senior and covered bonds.

Borrowing costs have plunged in recent years, providing an incentive to refinance at lower interest rates, although the window may be closing for dollar debt. Futures markets see about a 74 percent chance of a rate increase at the Fed meeting later this month, according to Bloomberg data.

UBS has also been issuing debt from a holding company set up last year, some of it replace bonds from operating companies.

“This transaction is consistent with our proactive approach to optimizing the Group’s interest expense, while maintaining our strong liquidity, funding and capital position,” the bank said in the statement.

Switzerland tightened capital rules for its biggest banks in October, forcing them to issue billions of francs in new bonds. UBS, the country’s biggest lender after Credit Suisse Group AG, had pressed the government for easier terms, describing the requirements as “by far the most demanding in the world.”

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