UBS Resumes Additional Tier 1 (AT1) Note Issuance Amidst Regulatory Scrutiny

Swiss banking giant UBS has made a significant move by resuming the issuance of Additional Tier 1 (AT1) notes, marking its first foray into this controversial financial instrument since the tumultuous Credit Suisse bailout. According to reports from the LSEG news service IFR, UBS is currently in the process of selling two tranches of U.S. dollar-denominated AT1 bonds. The offerings consist of a non-call five-year tranche with a yield of 10% and a non-call 10-year tranche offering a yield of approximately 10.125%. Notably, non-call bonds pay out solely at maturity.

UBS has acknowledged the issuance of additional Tier 1 securities but has yet to disclose specific contract details. In response to queries, the bank informed CNBC that more information regarding the offering would be released after the completion of the issuance.

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The action follows the Credit Suisse bailout that Swiss authorities orchestrated in March, which resulted in the destruction of $17 billion worth of Credit Suisse AT1 bonds. This move sparked outrage among bondholders and triggered legal ramifications for both the Swiss government and regulatory bodies.

Institutional investors hold hazardous junior debt in the form of additional Tier 1 bonds, also known as AT1 bonds. Introduced after the 2008 financial crisis, these instruments were designed to shift risk away from taxpayers and bolster financial institution capital, aiming to prevent future financial crises.

Fitch, the credit rating agency, assigned a BBB rating to UBS's new AT1 notes. This rating stands four notches below UBS Group's A viability rating. Fitch attributed two notches to "loss severity given the notes’ deep subordination" and an additional two notches for "incremental non-performance risk."

One distinguishing feature of UBS's new AT1 notes is the inclusion of a permanent write-down mechanism. Fitch did say that if UBS Group AG's 2024 Annual General Meeting (AGM) agreed, this mechanism would be replaced with an equity conversion mechanism.

This would make the terms more like those in other European markets. If the AGM approves, the notes will be converted into a pre-determined volume of UBS Group AG share capital if the latter's common equity Tier 1 (CET1) ratio drops below a 7% trigger or if FINMA declares a visibility event, according to Fitch.

As UBS treads cautiously into the AT1 market, regulatory scrutiny remains high. The introduction of a permanent write-down mechanism and the potential transition to an equity conversion mechanism underscore the bank's commitment to aligning with regulatory expectations and mitigating the risks associated with AT1 instruments. The market will be keenly watching the outcome of UBS's AT1 issuance and its broader implications for the financial industry.