UBS, which stepped in to buy stricken Credit Suisse over the weekend, has been placed Under Review with Negative implications by debt ratings agency DBRS Morningstar.
Analysts have placed the company’s debt under review because it’s difficult to grasp the full implications of the deal, which priced Credit Suisse’s shares at a deep discount and wiped out holders of its “additional tier”, or AT1, debt. They are also concerned about the risks of a subsuming Credit Suisse into UBS, particularly its investment bank.
The Under Review with Negative Implications banner means it remains difficult to assess the full capital, financial, and franchise impact of the announced transaction.
“While UBS has strong financial fundamentals, DBRS Morningstar believes this acquisition also creates potentially significant risks related to the execution of merging a substantial banking institution into UBS,” DBRS Morningstar said Wednesday.
These risks focus on Credit Suisse’ investment banking division, which was being restructured before the UBS bailout. “Credit Suisse has a number of outstanding litigation cases and operational risks”, especially connected to the investment bank, the ratings agency said.
Elisabeth Rudman, the head of the financial institutions group at DBRS Morningstar, discussed the implication of the debt writedown with Morningstar editor Lukas Strobl and banking analyst Johann Scholtz at the start of the week.
Rudman says that move to wipe out AT1 holders was unexpected but within the scope of what the regulator was able to do: “the terms of the instrument do allow for the regulator to write these instruments down in the case of non-viability, but that wasn’t what was expected. So I think we’ll have to see how the markets continue to react and how investors react as well.”
Currently the wider UBS AG Group is rated A (high) and its bank AA (low) – DBRS Morningstar issues credit ratings from AAA (a rating indicates low credit risk) to a C (a rating that indicates increased credit risk). Further levels of credit risk are made by using delineations such as (high) and (low) within each category. More on the ratings methodology employed by DBRS can be found here.
Further Reading
• Credit Suisse’s Near-Fatal Tailspin – How the Story Unfolded
• The Credit Suisse Scandal Timeline
• The Bond Funds Exposed to CS AT1
• CS and the Hierarchy of Risks
Waiting for More Information
The ratings agency is now awaiting more information from the combined entity before making the decision to change the ratings of the new UBS.
“During the review period, DBRS Morningstar will examine the financial plan and strategy which should provide more information on the outlook for P&L items, including the revenues of the combined entity, alongside the already announced cost reduction target of CHF 8 billion by 2027,” it said.
The picture is different for equity investors in UBS, argues Scholtz. UBS is retaining Credit Suisse’s banking operations, which is a positive for the acquiring rival, he says.
“Credit Suisse’s Swiss bank is a high-quality franchise and, together with UBS, it will have a dominant position in the Swiss market.”
DBRS Morningstar is the world’s fourth-largest credit ratings agency. It was acquired by Morningstar in 2019. To read the full DBRS statement click here. All content within denotes action by DBRS Ratings Ltd and is not that of Morningstar’s
