Credit Suisse will be fully acquired by UBS. In the short term, this will lead to a reduction in Credit Suisse's default risk. For investors, different monitoring contents impose themselves depending on the relationship with Credit Suisse.
On the evening of March 19, 2023, UBS announced its intention to fully acquire Credit Suisse in close coordination with the Swiss Financial Market Supervisory Authority (FINMA), the Swiss National Bank (SNB) and the Swiss Confederation. According to the SNB, the transaction is necessary to ensure financial stability as well as to protect the Swiss economy. Pension fund advisor PPCmetrics has summarized the key facts of the takeover and possible implications for investors.
Key facts about the acquisition
The takeover price respectively the transaction volume amounts to CHF 3 billion in total. Indicatively, this is CHF 0.76 per CS share (closing price of the CS share on 17.03.2023: CHF 1.86). The transaction structure is a share swap: Credit Suisse shareholders will receive one UBS share for 22.48 Credit Suisse shares.
The transaction does not require the consent of existing CS shareholders (emergency right of the Swiss government). The Swiss authorities (government, Swiss National Bank and the Swiss Financial Market Supervisory Authority) support the transaction.
The transaction is expected to close in Q2 2023 (subject to accelerated regulatory approval).
The current Board of Directors (with Chairman Colm Kelleher) and current UBS management (with CEO Sergio Ermotti) will lead the combined bank.
General implications for investors
In the short term, the transaction and the support from the Swiss authorities mitigated the counterparty risk or default risk of Credit Suisse. For diversified investors, no immediate measures (such as the transfer of liquid assets) are pressing, according to PPCmetrics' consultants.
According to partners Dr. Stephan Skaanes and Dr. Luzius Neubert, however, the exact implications of the transaction for the two institutions are still difficult to assess at the present time. There are also legal risks involved in the execution of the transaction. They assume that the Swiss Confederation, the SNB and the banks involved have a strong interest in a successful takeover. In the medium and long term, however, they see significant operational and legal risks for customers of the two banks. These would differ depending on the business relationship with Credit Suisse (e.g., investment in direct investments of Credit Suisse, Credit Suisse as custodian bank / global custodian, investment in financial products of Credit Suisse).
Implications for investors with direct investments
Equities, bonds, and convertibles (contingent convertibles / CoCos) as well as derivatives would be affected differently by the takeover. For investors with direct Credit Suisse investments, the advisors recommend the following measures: Quantify the investment in affected assets and monitor the default risk. It should be noted that certain Credit Suisse financial instruments would have to be written down.
In the medium term, the counterparty risk of UBS and Credit Suisse would accumulate because of the takeover. The consultants recommend analyzing whether the new counterparty risk is compatible with the risk appetite and the regulations (e.g., the investment regulations).
Implications for investors with custodian bank / global custodian Credit Suisse
Credit Suisse acts as one of the most important custodian banks or global custodians in Switzerland. For investors with custodian bank / global custodian Credit Suisse, the advisors recommend the following measures:
1. They see the main risk of the acquisition in operational aspects. The depository bank business requires significant investments in software and systems. For investors, it is important to monitor in the long term what the future system landscape of the new bank will look like and which systems will be developed further, and which will not be continued.
2. Staff departures could not be ruled out as a result of the merger. It is advisable to closely monitor the stability of the teams, including key personnel, and the satisfaction/motivation of the employees.
3. For investors with UBS and Credit Suisse as custodian banks, the counterparty risk and the operational risk are cumulative.
Implications for Investors with Credit Suisse Financial Products
Credit Suisse is one of the most important asset managers for institutional and private investors in Switzerland. For investors with investments in financial products or with mandates at Credit Suisse, the advisors recommend the following measures:
1. One of the main risks in asset management is staff turnover. The stability of the teams, including key personnel, must be monitored.
2. For investors who have mandates with Credit Suisse and UBS, the diversification across different asset managers is reduced. At the same time, operational risk is cumulative.
3. In the long term, the merger would lead to less competition and a reduction in product diversity in asset management. It is advisable to ensure that the conditions are in line with the market in the long term.
4. The consultants expect the legal conditions (e.g., asset management contracts) to be adjusted in the medium term. It must be ensured that the contractual adjustments do not result in a worse position compared to the status quo.
There are significant risks
PPCmetrics assumes that the Swiss Confederation, the SNB as well as the banks involved have great interest in a successful transaction. Nevertheless, they see significant operational and legal risks for clients of the two banks in the medium and long term.
Depending on the relationship with Credit Suisse (investment in direct investments, custodian bank/global custodian, and investment in financial products), investors are currently faced with different monitoring issues. However, they consider the following measures to be appropriate for all business relationships:
1. Checking whether the accumulated counterparty risk is compatible with the investor's risk appetite and regulations.
2. Monitor team stability, system landscape, and operational risks.
3. Detailed review of any new contracts.
4. Ensuring long-term competition (including market conditions, manager diversification and product variety) in asset management.