Mar 23, 2023
Credit Suisse’s Senior Bonds Are Now Beating Out UBS’s
(Bloomberg) -- Credit Suisse Group AG’s senior bonds are emerging as a winner from the lender’s emergency rescue — with returns that are now surpassing those of reluctant acquirer UBS Group AG.
A $1.5 billion note issued by Credit Suisse’s holding company is now offering a total return of 1.375% year-to-date, based on data compiled by Bloomberg. An almost identical bond issued by UBS, meanwhile, gives a return of just under half that.
The rally in the Credit Suisse bonds, while expected after the forced merger with UBS, is still eye-catching, given how painful the forced merger was for other creditors of the failed bank. Some 16 billion francs ($17.5 billion) of contingent convertible bonds, referred to as AT1s, were wiped out in the deal.
The majority of the moves came this week, after the Swiss government-orchestrated deal between the two lenders effectively brought Credit Suisse’s senior debt under the umbrella of UBS. The note issued by the bought-out bank closed its gap with US Treasuries by around 80 basis points, while the UBS equivalent note widened by around 40. A similar trend is also apparent in the lender’s euro-denominated senior notes.
This type of bond is unrelated to the Additional Tier 1 debt that was written down as part of the takeover. In fact, the gain on Credit Suisse’s senior notes may have negated AT1 losses for some investors, like BlueBay Asset Management.
“While Credit Suisse senior bonds are tighter, UBS senior bonds have been hurt,” said Kaspar Hense, an investment grade portfolio manager at BlueBay. He said the firm’s position in the Swiss bank’s senior debt has more than offset their AT1 losses.
Credit Suisse’s euro-denominated senior bonds have also been outperforming, with a €1.25 billion note tightening by nearly 200 basis points to give a year-to-date return of 2.89%, more than double that of a similar UBS bond. The lender’s senior notes are also outperforming equivalent bonds issued by other banks in euros, according to a Bloomberg index.
“Credit Suisse’s senior started the year trading at a discount to European peers as a legacy of scandals weighing on investor sentiment,” said Gordon Shannon, a portfolio manager at Twenty Four Asset Management. “Now that CS senior is effectively UBS debt, their spreads have dramatically converged — causing a sharp tightening in CS senior yield and producing a significant capital gain for holders.”
UBS on Wednesday offered to buy back bonds that were issued just days before it agreed to the Credit Suisse deal. The takeover sent a gauge of UBS’s credit risk soaring, with the cost of insuring its debt against default for one year rising to a record this week.
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