UBS terminates its backstop arrangement with the Swiss government, signaling confidence and potential benefits in negotiating the retention of Credit Suisse's business. UBS shares surge as Credit Suisse reassures markets.
Troy D. Hanson
August 12, 2023
UBS, the Swiss multinational investment bank, made the decision on Friday to terminate its backstop arrangement with the Swiss government. This move represents UBS's confidence that no unforeseen setbacks will arise, which could potentially harm the bank in a similar manner to Bank of America's acquisition of Countrywide.
The 9 billion franc loss protection agreement between UBS and the Swiss government, as well as the 100 billion franc public liquidity backstop with the Swiss National Bank, have been officially terminated. These agreements were put into effect on the day UBS acquired Credit Suisse.
Initially, the agreements were seen as necessary to safeguard UBS against potential risks. Given the limited time available to review the assets during the rescue weekend, it was a precautionary measure. However, after conducting a thorough review of all the assets covered by the loss protection agreement since the acquisition in June and making appropriate fair value adjustments, UBS has concluded that the agreement is no longer needed.
As part of terminating the loss protection agreement, UBS will pay the Swiss government 40 million francs. Credit Suisse, on the other hand, incurred a commitment fee and a risk premium of 214 million francs for the public liquidity backstop. They also paid a risk premium of 476 million francs for emergency liquidity assistance, in addition to repaying a loan worth 50 billion francs.
UBS Shares Surge as Credit Suisse Reassures Markets
UBS shares (UBSG, +3.68% UBS, +0.73%) have seen a significant 5% increase in Zurich trade, continuing their upward trend this year with a total gain of 19%.
Analyst Andrew Coombs from Citi highlights that UBS's decision to forgo the backstop will not only result in savings on fees but also send a powerful message to the markets.
"This move is more than just cost-saving. It provides reassurance on the health of Credit Suisse's non-core portfolio, aligning with our previous findings. Furthermore, the early voluntary repayment could potentially benefit UBS in negotiating the retention of Credit Suisse's Swiss business," stated Coombs.
Credit Suisse has experienced a string of issues and legal challenges leading up to its near collapse, including losses on loans to Archegos Capital Management and the collapse of Greensill supply-chain funds. UBS was recently fined nearly $400 million by regulators in the U.S. and U.K. due to Credit Suisse's "unsafe and unsound" counterparty credit risk management practices in relation to Archegos.
The upcoming UBS results will present a complex picture as they will only include Credit Suisse results for June, with previous periods remaining unadjusted.