Are storm clouds gathering over the UK housing market? Part one…
An enthralling 3-2 win over Serbia last Friday meant Switzerland qualified for the knock-out stages of this year’s football World Cup, setting up a game with Portugal in the last 16. With talk (in Switzerland) that this might be their best ever team, there is a strong chance of an upset and perhaps even a semi-final clash with the mighty England.
The Swiss feel-good factor extended into the capital markets on Monday morning, with UBS announcing a call of its 5% perpetual Additional Tier 1 (AT1) bond. This particular AT1 has been the subject of much discussion throughout 2022, owing to the fact that it has the lowest reset in the mainstream AT1 market at +243bp (the reset spread over risk-free determines an AT1 bond’s new coupon if it isn’t called at its first call date). This makes the announced call uneconomical for UBS, since a non-call would have reset the coupon to around 6.375%, which is perhaps 200bp lower than where UBS could price a new issue. However, we have long said that the economics of the reset are not the only thing investors should consider when looking at the likelihood of AT1 calls.
For a bank like UBS, which has many different units with different interests, not to mention a large debt stack made up of everything from multiple AT1 issues to senior unsecured bonds, it is not necessarily the short term economics of a call driving the decision; the desire to be considered in the very top echelon of banks in terms of practices and bondholder relationships also plays a part. This of course is only enabled by a strong capital position, with UBS having a 410bp buffer to its Common Equity Tier 1 (CET1) requirements, which total around CHF 13bn ($13.9bn). Thursday’s decision should result in the rest of UBS’s debt stack trading tighter over time, but more broadly it should act as a reminder to the market that European banks are very well capitalised and will endeavour to exhibit best practice at all times. Indeed, at time of writing UBS AT1s are up by around 1.5 points, whilst the rest of the AT1 universe is up by around 1 point.
Staying in Switzerland, the volatility around Credit Suisse has continued over recent weeks. Concerns over customer outflows have led to its senior debt trading at levels above 10% in dollars, and the yield on its AT1s peaked above 20% last week. However, on Friday the bank’s chairman, Axel Lehmann, announced that outflows from the bank have “basically stopped” and that liquidity had improved. This led to a bounce in CS bonds, and with the rights issue due to settle this Friday we could see this continue, especially considering the fact that analysts at the 20 banks on the rights issue deal are currently ‘restricted’ on the name, hence a raft of buy recommendations could emerge once this has settled and the positive news is digested. In our view, the yield on CS bonds currently is remarkable considering the bank’s solid capital position, strong brand and assets at its disposal.
And so, while the Swiss football players are trying to make headlines at the World Cup, a couple of big players are making headlines at home.