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FYI - for the purposes of Credit Default Swaps, Credit Suisse was not a bankruptcy event.
CDS Panel Rules Credit Suisse Takeover Not a Bankruptcy Event
A panel overseeing the credit-default swap market has ruled that the government-brokered takeover of Credit Suisse Group AG didn’t constitute a bankruptcy event in which an insurance payout could be triggered.
The Credit Derivatives Determinations Committee said the fire sale of Credit Suisse to UBS Group AG was not a bankruptcy credit event, according to a notice on its website. The question to the panel had related to both senior and subordinated Credit Suisse Group swaps.
@jack If they’re bankrupt, the credit insurers are fucked. As a result, this bankruptcy is “not a bankruptcy”. The can gets kicked again.
19B in default swaps lol. This will be argued in court for the next 10 years at least (although I recognise it will likely be a waste, and this was not a “default”)
@Gen the bonds are fine. It would be dumb if the CDS considered it a default. (The cds is on normal bonds, not AT1s)
For basically all technical purposes, Credit Suisse did not become insolvent or bankrupt. It did undergo a merger under distress forced by the swiss regulators, but that's a very different thing if you look at the technicalities, which the financial instruments care about.
@AlbertoM It doesn’t seem like UBS will dismantle CS. If it continues to exist, it might still go bankrupt later this year.
It appears that, at the behest of Swiss regulators, Credit Suisse will soon be broken up, with UBS being paid to take over at least part of it. "The bank was dismantled, and a rival bank had to be paid to take over its assets" certainly sounds bankruptcy-equivalent, and that more or less tracks with the other recent bank failures. Your thoughts on market resolution under those conditions, @SG?
@Endovior If a company is purchased by another company, even under very distressed circumstances, that is usually still not bankruptcy. On the other hand, if the bank was liquidated, assets were sold off to pay creditors, and the company's shares were wiped out, that would be basically akin to bankruptcy.
@Endovior I'm seeing it reported that UBS is paying 3B CHF for it, not being paid to take it on. Shareholders not being wiped out = not bankrupt.
@jack If this was a normal sale that CS voluntarily sought out, I'd agree... but CS is being forced to sell to UBS by Swiss regulators.
@chrisjbillington UBS is putting in 3 billion, yes, but the Swiss government have also agreed to give UBS 9 billion in compensation to cover expected losses:
https://www.dw.com/en/ubs-and-swiss-national-bank-agree-to-credit-suisse-takeover/a-65041855
That, combined with the way shareholders and bondholders are being wiped out, implies that the company is worth something like negative 6 billion dollars.
@Endovior I see. Yes, that's pretty interesting. Strange that the shareholders would be paid before others...
@chrisjbillington Doesn't appear that they are acquiring the entire book. Just select units of the company, right?
@Endovior Unless I missed something, I don't see where in the link supports what you're saying. The shareholders aren't being wiped out - they are certainly getting less for their shares than they were last week, but it is a positive amount. And the article mentions nothing about bondholders being wiped out - bondholders are before shareholders in line, so they aren't wiped out, unless something very strange happened.
Ah, $17bn of Credit Suisse bonds are being written down to zero: https://www.ft.com/content/d1ae9a54-c4a7-4742-8b2d-afff549f4f95. This is a rather unusual (I think) step imposed by the Swiss regulators, apparently.
@jack I feel like this deal couldn't happen like this in the US. how do bondholders get wiped out but not shareholders. Usually the order is reversed, right?
Found out some more info that sheds some light on this. Seems like CS ordinary bonds are fine, only special AT1 bonds are being wiped out - AT1 bonds have a provision that allows them to be converted to equity capital.
https://www.nytimes.com/2023/03/19/business/credit-suisse-investors-hedge-funds.html
The second trade that investors plowed into was in Credit Suisse’s roughly $17 billion of so-called AT1 bonds. This is a special type of debt issued by banks that can be converted to equity capital should they run into trouble. This made that debt inherently riskier to hold, because it carried the chance that bondholders could be wiped out.
It said that the AT1 bonds would be wiped out as part of the deal, to add roughly $16 billion of equity to support UBS’s takeover.
That raised eyebrows among some investors because it upended the normal order in which holders of different assets of a company expect to be paid in bankruptcy. Stock investors are at the bottom of that repayment list and usually lose all their money ahead of other investors.
However, in this instance, regulators chose to trigger the conversion of the AT1 bonds to equity capital to help the bank, while still offering Credit Suisse shareholders one UBS share for every 22.48 Credit Suisse shares held.
@jack I'm a bit confused about the situation and not well-informed.
The Swiss government is giving a $9 billion guarantee for potential losses from assets UBS is taking over, and the price that UBS is paying is roughly $3 billion.
Doesn't this imply something about the UBS and the Swiss government thinking it quite likely that Credit Suisse might indeed turn out to have been insolvent?
If in the future the Swiss government pays UBS $6 billion because of Credit Suisse liabilities, would this be reason to think that the market should resolve positively?
What about if the Swiss government or UBS straight up say something like "in March 2023, Credit Suisse was insolvent"?
@TobiasHaeberli @jack
It seems that the SNB can only give "Emergency Liquidity Assistance" if the financial regulator (FINMA) deems them solvent.
"Emergency liquidity assistance is provided only if the bank or group of banks seeking credit is of importance for the stability of the financial system and is solvent, and if the liquidity assistance is covered by sufficient collateral at all times." (SOURCE)
So the SNB offering Emergency Liquidity Assistance points towards FINMA finding CS solvent.
I think in general, there is a lot of uncertainty about the value of a bank's assets, a wide confidence interval, plus they fluctuate with market conditions. So the backstop is to help protect UBS in case of outcomes on the lower end of the confidence interval.
CS's AT1s have a rule that if the bank's equity capital ratio falls below 7%, then the AT1 is written down to zero. Notably, the threshold is 7%, not 0%. Seems like that is what happened, so that's why AT1s can be zeroed while the common stock is not zeroed.
Matt Levine explains it well here: https://www.bloomberg.com/opinion/articles/2023-03-20/ubs-got-credit-suisse-for-almost-nothing
> The AT1s are junior to the common stock. Not all the time, and there are scenarios (instant descent into bankruptcy) where the AT1s get paid ahead of the common. But the most basic function of the AT1 is to go to zero while the bank is a going concern with positive equity value, meaning that its function is to go to zero before the common stock does.
> The Credit Suisse AT1 securities are getting zeroed. This is not, to be clear, exactly because Credit Suisse’s CET1 capital fell below 7%; instead, there is a separate clause of the AT1s allowing them to be zeroed if the bank’s regulator decides that zeroing them is “an essential requirement to prevent CSG from becoming insolvent, bankrupt or unable to pay a material part of its debts as they fall due.”
Here, CS did not instantly descend into bankruptcy, so the AT1s were zeroed while the common stock was not. The AT1s were zeroed to prevent CSG from becoming insolvent, bankrupt, or unable to pay its debts.
https://www.ft.com/content/17892f24-4ca0-417f-9093-289b019a0852
"UBS is in discussions to take over all or part of Credit Suisse, with the boards of Switzerland’s two biggest lenders set to meet separately over the weekend to consider what would be Europe’s most consequential banking combination since the financial crisis, according to multiple people briefed on the talks."
@mvdm Given that UBS is apparently demanding six billion dollars to allow it to handle the winding down of the acquired business, that sounds like Credit Suisse is worth... negative six billion dollars?