S&P Global Ratings revised its outlook on UBS Group AG’s credit to negative on Monday, and said it expects the integration of large parts of Credit Suisse’s investment banking activities to carry material execution risk.
The rating agency affirmed UBS’ A- issuer credit rating. The move comes after UBS agreed to take over Credit Suisse on Sunday in a move brokered by the Swiss government and central bank.
“We believe that UBS’
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management will prudently execute the CS
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integration and, due to the very high financial buffers resulting from the transaction and massive liquidity support from the Swiss central bank, we see sufficient buffers to limit emerging risks effectively,” S&P said in a statement.
However, given the size and weaker credit profile of Credit Suisse and the complexity in winding down a large part of its investment banking operations, there is a risk that the combined group will see a weakening of its competitive position or will miss financial targets due to restructuring or litigation costs that could be substantial.
“In our base case, we already anticipate client churn at the combined entity, particularly in wealth management and Swiss banking, where both entities have significant client overlaps,” said S&P.
UBS is paying just 3 billion Swiss francs ($3.2 billion) for Credit Suisse, which is a fraction of its tangible book value of CHF42 billion at the end of 2022.
“This will likely result in realization of material badwill, even after the revaluation of CS’ balance sheet,” said the statement.
The Swiss government is providing CHF9 billion of protection in the event that losses from the complex wind-down of the separately managed non-core units exceed CHF5 billion, S&P noted. And the decision to write down its roughly CHF16 billion of additional Tier 1 instruments will further strengthen the core equity base of the combined entity.
The agency was referring to the Credit Suisse contingent convertible bonds or CoCos, which were written down to zero as part of the deal, a move that surprised investors as it wiped out the holders of those bonds.
See now: What are CoCos and why are Credit Suisse’s now worth zero?
S&P said its downside scenario would come if the capitalization decreases sharply because of the merger from the realization of risks, or if new litigation cases result in significant charges that are “materially beyond our base case.”
Also Monday, Moody’s Investors Service placed its rating on Credit Suisse’s debt on review for an upgrade, saying that Credit Suisse will benefit from being owned by UBS, “a stronger financial group,” and Credit Suisse’s creditors “will also benefit from enhanced liquidity and downside protection.”
