UBS May Sell Contingent Capital Two to Three Times a Year
February 23, 2012, 1:22 AM ESTBy Elena Logutenkova
(Updates with CFO comments from second paragraph.)
Feb. 22 (Bloomberg) -- UBS AG, Switzerland’s biggest bank, may sell contingent capital bonds two to three times a year to satisfy regulatory requirements early, Chief Financial Officer Tom Naratil said.
The Zurich-based bank saw “strong” demand for its debut $2 billion bond last week and could have raised as much as $5.5 billion, Naratil said today in a written response to questions. The 10-year securities have a 7.25 percent coupon and will be written off if UBS’s common equity ratio falls below 5 percent or the bank faces a bailout.
Under Swiss rules, UBS and Credit Suisse Group AG need to have at least 6 percent of risk-weighted assets in contingent capital that is triggered if common equity falls below a 5 percent threshold. That means UBS may need to raise about 16.2 billion Swiss francs ($17.8 billion) in contingent capital if it cuts risk-weighted assets to the targeted 270 billion francs.
About 60 percent of the first sale went to investors in Asia and the rest in Europe, where demand came mainly from Switzerland and the U.K., Naratil said. Private banks, managed funds and hedge funds bought the bonds, he said.
The bonds, which priced at par last week, were quoted at 98.78 cents on the dollar at 3:34 p.m. Zurich time, according to Bloomberg bond trader prices. Royal Bank of Scotland Group Plc quoted the bonds on Bloomberg as low as 97 cents on Feb. 16.
Price Drop
“The short price drop last week was in line with other banks following the Moody’s announcement,” Naratil said, referring to Moody’s Investors Service’s review of ratings for 17 banks. “Now they trade again in the range where we expected them to be. We will continue to strengthen our capital base and believe that we are in a good position for future similar issuance.”
UBS has said previously that it prefers to sell contingent capital that won’t convert into shares if triggered and that the bank doesn’t plan to raise any contingent capital that’s triggered if the common equity ratio falls below 7 percent.
Credit Suisse last February agreed to sell $3.5 billion and 2.5 billion francs of contingent convertible bonds, known as CoCos, to existing shareholders in Qatar and Saudi Arabia in exchange for Tier 1 capital notes sold in 2008. The bonds, which would convert into shares if the bank’s Basel III common equity ratio falls below 7 percent, will be issued no earlier than October 2013. The bank then also sold $2 billion of CoCos to public investors.
UBS’s capital ratio for triggering the contingent capital bonds will be calculated under the prevailing regulatory rules, the bank said. The company has to satisfy Basel 2.5 rules until the end of this year, and then adopt various Basel III changes as they are phased in. The bank’s core Tier 1 ratio under Basel 2.5 rules at the end of 2011 was 14.1 percent, which was equivalent to a common equity ratio of 10.8 percent under phased-in Basel III rules.
--With assistance from Ben Martin in London. Editor: Dylan Griffiths, Keith Campbell.
To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net
To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net
