UBS agrees £8bn loss protection deal paving way for completion of Credit Suisse tie-up
UBS has agreed a loss protection deal with Swiss authorities worth CHF9bn (£8bn), paving the way for the merger of Switzerland’s largest banks next week.
Under the arrangement announced today, UBS will bear the first CHF5bn of potential losses on a defined portion of Credit Suisse’s assets. The Swiss government will then cover the next CHF9bn.
Both parties are keen to try and avoid putting taxpayers on the line for potential losses. UBS said it will “manage non-core assets in a prudent and diligent manner to minimise losses and maximise value realisation”.
UBS will also cover the initial and ongoing external costs of the agreement, which will become effective upon completion of the acquisition.
UBS has been negotiating with authorities since the takeover over the scope of government support.
The deal, engineered by Swiss authorities in March to prevent a broader financial meltdown, is the largest banking merger since 2008. It will create a banking behemoth with over $5trn in assets, twice the size of Swiss GDP.
As the deal was completed so quickly, UBS was unable to conduct thorough due diligence. As a result it has sought protections from probable losses on some of Credit Suisse’s portfolio which it is looking to sell.
All in all, UBS estimates that it will take a $17bn hit from the takeover of Credit Suisse, resulting from a $13bn hit from fair value adjustments and $4bn in potential litigation and regulatory costs.
Many aspects of the deal have already been challenged by politicians and lawyers, including the controversial wipeout of Credit Suisse’s AT1 bonds.
Despite the complexities and costs associated with the deal, many analysts have pointed to the significant opportunities the deal poses for UBS, particularly in wealth management.