2023-06-09 07:54:31 ET
UBS ( NYSE: UBS ) and the government of Switzerland on Friday signed a loss protection agreement that clears the way for UBS to acquire beleaguered peer Credit Suisse ( NYSE: CS ) as soon as Monday.
On March 19, UBS ( UBS ) agreed to the acquisition in order to avert a CS bankruptcy, which "would have had serious ramifications for the Swiss economy and international financial stability," the Swiss government said in a statement.
As part of that acquisition, UBS is taking on some assets that don't fit its core business. Under the government-brokered acquisition, the Confederation of Switzerland agreed to bear some of the losses arising from selling or winding down the relevant assets.
Under the loss protection agreement, UBS ( UBS ) will be responsible for the first CHF 5B (US$5.5B) of any losses realized when winding down the Credit Suisse ( CS ) assets that are non-core to UBS's business. If that amount is exceeded, the Swiss federal government will cover the losses up to CHF 9B.
In Zurich trading on Friday afternoon, UBS ( UBS ) shares slipped 0.5% and Credit Suisse ( CS ) shares fell 0.5% .
The portfolio of assets under the loss protection agreement comprises about 3% of the combined assets of the merged bank. It primarily includes loans, derivatives, legacy assets, and structured products from Credit Suisse's ( CS ) non-core unit.
UBS ( UBS ) will pay the federal government a guarantee fee consisting of an initial set-up fee of CHF 40M, an annual maintenance fee of 0.4% of CHF 9B to cover the Confederation's advisory costs, among other things, and an annual drawn portion fee of between 0% and 4% of CHF 9B, depending on the already realized losses and those still expected.
"The greater these losses, the higher the respective risk premium, which will have to be paid only in the event of the guarantee being drawn," the government said.
The agreement will remain in place until the final realization of the guaranteed portfolio; that is, the assets are sold or wound down. UBS ( UBS ) can end the loss protection agreement at any time, but as a result wouldn't benefit from the federal loss protection.
Under the agreement, UBS ( UBS ) is required to manage the assets to minimize losses and maximize realized proceeds. It's also required to form a separate organizational unit to manage the Credit Suisse ( CS ) non-core assets, appoint an oversight committee and management team for the unit, and to report to the federal government on a quarterly basis.
The agreement also requires that UBS ( UBS ) keep its headquarters in Switzerland.
The Swiss government also reported that Credit Suisse ( CS ) has repaid in full its outstanding amount under the public liquidity backstop of up to CHF 100B provided by the Swiss National Bank.
"Consequently, the Confederation has not yet incurred any losses on the corresponding guarantee, and instead generated receipts of CHF 111M as of the end of May," the Swiss Federal Council said .
While the government-led deal averted a Credit Suisse bankruptcy and helped to stabilize the global financial system, the Swiss government and regulators are facing lawsuits stemming from the cancellation of about $18B of Credit Suisse Additional Tier 1 Capital debt .
More on UBS's acquisition of Credit Suisse:
- UBS Acquisition of Credit Suisse: More Problems Ahead
- UBS expects to close Credit Suisse acquisition next week
- Credit Suisse repays $113B government-backed lifeline
- EU gives greenlight for UBS's acquisition of Credit Suisse
- Credit Suisse staff said to prepare suit against Finma over lost AT1-linked bonuses
For further details see:
UBS, Swiss government sign loss protection pact for Credit Suisse acquisition