UBS and Swiss government seal €9.25bn loss guarantee deal

UBS has finalised an agreement with the Swiss government that will provide the bank with up to SFr9 billion (€9.25 billion) to protect it from losses on the rescue of Credit Suisse.

The loss protection agreement is the final hurdle for UBS to cross before completing the takeover early next week.

In talks with Swiss authorities over rescuing its rival Credit Suisse in March, UBS convinced the government to contribute up to SFr9 billion to cover losses the bank would make in winding down unwanted assets.

The government assistance would kick in after UBS covered the first SFr5 billion of losses. The guarantee covers a SFr44 billion portfolio of Credit Suisse assets that UBS plans to wind down – equivalent to 3 per cent of the combined group’s total assets and made up mainly of derivatives, loans, legacy assets and structured products in the investment bank.

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“UBS will manage these assets in a prudent and diligent manner and intends to minimise any losses and maximise value realisation on these assets,” the bank said on Friday.

“It also will cover the initial and ongoing external costs incurred by the Confederation and Finma for the [loss protection agreement].”

The rescue of Credit Suisse, which was engineered by Swiss authorities, is expected to be the most significant and complicated banking merger since the financial crisis.

The size of government support for the deal – which also includes a SFr100 billion liquidity line – and the potential for job cuts and branch closures in Switzerland have led to criticism domestically.

Swiss parliamentarians on Thursday voted to empower a special parliamentary commission of inquiry into the downfall of Credit Suisse. It is only the fifth occasion such a committee – with unlimited powers of subpoena and the ability to compel testimony – has been created in the 175-year history of the current Swiss constitution.

The commission is certain to call on present and former senior executives from both UBS and Credit Suisse to give sworn public testimony, as well as government ministers and regulators.

It is likely to be a boon for angered Credit Suisse additional tier 1 bondholders, wiped out by the deal, who are in the early stages of legal action against the Swiss government.

[ Credit Suisse investors sue Swiss regulator over bond wipeout ]

With the federal election due in October, the political environment for UBS is unlikely to be favourable.

A poll published shortly after the deal was announced showed that three-quarters of voters wanted the mega bank to be split up.

A month later, Swiss parliamentarians voted against the government’s SFr109 billion financial package that underpins the deal in a symbolic protest.

Last month, the country’s left-leaning Social Democratic party said it had drawn up plans to halve the bank’s post-merger balance sheet, bringing it down from SFr1.5 trillion to closer to the country’s gross domestic product of SFr734 billion.

UBS executives are at pains to show investors they will try to limit their dependence on the state and avoid using the government’s support. Recently returned chief executive Sergio Ermotti has insisted that Swiss taxpayers are “exceptionally unlikely” to suffer losses on the takeover.

As part of the agreement, UBS will pay SFr40 million to the Swiss government for setting up the guarantee, a SFr36 million annual maintenance fee while it is in place and interest on the money it uses, which ranges from 0.4 per cent to 4 per cent, depending on how much is drawn down.

On Wednesday UBS confirmed Financial Times reporting that it would push back its second-quarter results from July 25th to August 31st in recognition of the complicated task of bringing together two accounting frameworks.