Credit Suisse shares dropped as much as 65% on Monday after the struggling Swiss bank agreed to be taken over by its rival UBS at a steep discount.
The decline in Credit Suisse’s shares CSGN, -0.10% CS, -52.99% mostly reflected the 59% discount it agreed to take in the deal initially valued at 3 billion francs, but also reflected the slide in UBS shares UBSG, 3.95% UBS, +3.30% after the transaction was announced.
UBS shares in the afternoon were trading 5% lower, as investors balanced the risks of absorbing Credit Suisse with the future profit potential. UBS expects the deal to lift earnings by 2027 and points out it would have some $5 trillion in invested assets.
The Euro Stoxx banks index SX7E, 4.18%, which doesn’t include UBS or Credit Suisse, fell 1% in see-saw trade.
Among the worries that stem from the deal was that the Swiss government wrote down the value of what are called AT1 bonds to zero. These bonds, also called contingent convertible bonds or CoCos, have been a key funding source for European banks.
The Invesco AT1 capital bonds ETF dropped 14%.
“It has become harder to assess the attractiveness of the current historically large spread pick-up provided by AT1 bonds vs. their [high-yield] corporate counterparts, which will likely constrain the appetite towards the AT1 asset class,” said analysts at Goldman Sachs.