Shareholders and Bondholders Be Damned

The UBS buyout of Credit Suisse broke records and has sent shivers through the investing community. In a deal inked on Sunday night, the Swiss authorities wiped out the bond holders and accepted a massive write down for equity holders without so much as a press release, let alone a shareholder’s meeting.

In the well publicised deal, Credit Suisse shareholders received the equivalent of 0.76 francs for each share in UBS equity. They’ll receive one UBS share for every 22.48. This was just less than a 60% haircut from the last share traded the Friday before. UBS shareholders are likely just as concerned, as the derivative book and liabilities of Credit Suisse may well have made the company a net liability, rather than a 3.3 billion dollar asset that it was ultimately sold for. UBS was a reluctant participant, and provided a final offer well below the final amount, with the promise of 100 billion francs from the Swiss Central Bank needed to seal the deal.  

One can only wonder what the UBS risk team and top executives thought when they took a peek under the hood. Some insight came from UBS chairman Colm Kelleher commenting in the aftermath “Let me be very specific on this: UBS intends to downsize Credit Suisse’s investment banking business and align it with our conservative risk culture”.

What does this new precedent mean for bondholders? In almost all previous financial firesales, bondholders have been given preference to stockholders. If you invest in a company hoping the company returns dividends and sees capital appreciation, then you are also taking the risk on the downside. People are interested in holding bonds because they are paid out first when a company is liquidated. They accept generally lower (and capped) yields, and receive safety in return. The Credit Suisse meltdown has flipped the tables however, with bond holders being wiped out, and stockholders getting first dibs on the value of the company. 

What does this mean for stockholders? Well, your shares can be sold with no notice, without your consent, without any shareholders meeting, for pennies on the dollar.

Obviously, none of this was legal of course. Legislation was passed on a Sunday that enabled the AT1 bondholders to be wiped out before shareholders.

For both groups, it is now clear that the level of counterparty risk and the rule of law have changed dramatically. You can’t bank on the laws that protected your investor rights staying in place over the weekend. In fact, weekends are possibly the worst time to be an investor in any asset class… well except precious metals of course. Our online store is open 24/7…