@AlbertoM It doesn’t seem like UBS will dismantle CS. If it continues to exist, it might still go bankrupt later this year.

@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.

What about if the bondholders suffer losses because the company shares are not converted, ie into UBS stock?

definitely not a bankruptcy. Anyone who disagrees, I challenge you to find a mainstream media outlet reporting this as being bankruptcy equivalent

@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.

Also: The Swiss government has provided guarantees of up to 9 billion Swiss francs to underwrite the takeover. They are not paying UBS money now. They are backstopping it in case there are losses. Very important distinction.

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?

@BTE Yes, bondholders get their money back before shareholders is normally how it works.

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.

@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?

@dreev it is significantly higher, because a CDS only covers the part of the loan creditors don't get back

@MP You're saying Credit Suisse can go bankrupt without defaulting on its loans? How would that play out? Or have I misunderstood?

@dreev Defaulting on loans doesn't mean paying out zero on them E.g. SVB's debt was still trading at 30 cents on the dollar on Friday after SVB was closed by the FDIC. In a case like that, CDS would pay out the difference (70 cents).

@jack When you buy a CDS, you're buying the difference from par of a bond that defaulted. Therefore if CS defaults (and the CDS will certainly have a precise definition of what default means), a defined period later it will conducted an auction of the bond. If it comes at sat 30c, the party that sold the CDS pays 70c. Pay attention that how much it's actually recovered by CS creditors doesn't matter, only the market expectations after the default

@MP @jack Thanks y'all! So the CDS is 1-x where x is how many cents on the dollar Credit Suisse's debt is worth in expectation? That was apparently 88 cents on the dollar this morning (CDS at 0.12). In a universe where Credit Suisse's debt is either worth 100 cents on the dollar or 0 cents on the dollar, that would imply a 12% chance of default/bankruptcy. But the CDS price is also consistent with a universe where Credit Suisse is 100% going to default and when it does, we know that creditors will recover 88 cents on the dollar.

Have I got that right? If so, is there another way to reason about the actual probability of default/bankruptcy?

@dreev yes, blooming will present base rates of recovery. People smarter and richer than me were using a 40% recovery

@MP Blooming? And does "40% recovery" mean 60% for this market?

@dreev

https://twitter.com/AlexRoyce123/status/1636249273024036864?t=dxTzvK72mYb4acZg4SZi4g&s=19

I meant Bloomberg

@MP Thank you! Following the chain of links there, I get to this: https://quant.stackexchange.com/questions/15986/how-to-compute-the-implied-probability-of-default-from-a-cds-spread

@chrisjbillington Yes, it will. Should have clarified this after problems with my other market. I will interpret "bankruptcy" in a commonsense manner in line with my total lack of knowledge of Swiss banking law.

@SG What about a bailout by the Swiss government where it is unclear as to whether CS would ultimately need to go "bankrupt" in any sense of the term

Swiss regulators would provide liquidity if needed

https://www.wsj.com/articles/credit-suisse-shares-plunge-as-bank-storm-spreads-to-europe-7251349d?st=f3yco702n36p92e&reflink=desktopwebshare_permalink

@CarsonGale A bailout will only count if there is a crisis and the bank would be insolvent if immediate action weren't taken. If the bank is given government support in a time of non-crisis when CS's finances look dicey but not on the brink of collapse (such as today), it wouldn't count.

The pricing went up a lot today after the news that Saudi National Bank can't provide more financing due to regulations: https://www.cnbc.com/2023/03/16/stock-markets-credit-suisse-spreads-the-banking-crisis-to-europe.html

@MP Generally, I think so.
The UBS was bailed out in 2018 (https://www.swissinfo.ch/eng/business/2008-crisis_the-day-ubs--the-biggest-swiss-bank--was-saved/44474630).
But since then, the government tried to implement "too big to fail" policies that should ensure that banks can go bankrupt without as much negative effects as the government expected in 2008.

@TobiasHaeberli The Swiss national bank categorizes Credit Swiss as a "systemically important" bank. Which means that they have to meet more financial requirements than other banks. Specifically: "hold higher capital and liquidity buffers and maintain recovery and emergency plans".

@TobiasHaeberli Our SVB bank was solved to N/A because banks don't bankrupt in America

@Endovior we'll see. I work for a competitor and my understanding from people in the know is that this is pretty unlikely. I think the chance of bankruptcy is somewhat correlated with market conditions generally.

@Endovior And the market is not very impressed with the Saudi crown prince's pledge to invest, either.

@NicholasCharette73b6 I've seen a large number of folks from the banking side leaving to other firms due to the declining reputation.

@SG Also see CDS for Credit Suisse priced at ~250

@NicholasCharette73b6 Now >500 bps