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UBS to Issue More Loss-Absorbing Capital

Swiss Bank UBS plans to sell more loss-absorbing capital to meet tougher rules for banks following a $2 billion Tier 2 note issue, it said on Wednesday.

UBS headquarters in Zurich, Switzerland.
Steffen Schmidt
UBS headquarters in Zurich, Switzerland.

"Today's deal marks the beginning of an issuance program as we build our loss-absorbing capital base to meet FINMA and the Basel Committee requirements for systemically important banks well in advance of the regulatory deadlines," UBS's financial head Tom Naratil said.

UBS's 10-year notes, sold last week, pay a coupon of 7.25 percent, and the loss absorption trigger is set at a 5 percent common equity ratio.

That means the bonds would be written down permanently if the bank's common equity Tier 1 ratio falls below 5 percent, which UBS is currently well north of, or is considered non-viable.

The instruments were placed with private and institutional investors in Asia and Europe, UBS said.

Ratings agency Fitch assigned the notes a BBB-rating. UBS's issue comes one year after Credit Suisse issued 6 billion Swiss francs ($6.6 billion) in so-called contingent convertible bonds, or CoCos, to existing shareholders.

Shortly after that, Credit Suisse issued $2 billion of CoCos publicly.

The instruments are a response to new capital rules laid out by Swiss financial regulator FINMA, in contrast to the remainder of Europe, which is still awaiting the final version of new Basel rules this summer.

Among the other banks to have tested the nascent market for this type of instrument are Zuercher Kantonalbank, which issued the first public new-style hybrid Tier 1 issue in Europe last month with a 590 million Swiss franc perpetual non-call 5.5-year issue, which UBS helped sell.

Dutch cooperative Rabobank also tested investor appetite for permanent write-down instruments with a $2 billion perpetual non-call 5.5-year additional Tier 1 issue last year.

The issue's principal can be written down permanently on a pro rata basis when an 8 percent equity capital ratio is reached.

Unlike Credit Suisse's bonds, UBS's won't convert to shares if the trigger is hit, reflecting the bank's desire not to dilute shareholders following repeated cash calls as it struggled under the weight of more than $50 billion in mortgage-writedowns during the subprime crisis.

UBS accepted a government-backed rescue package in October 2008.

Credit Suisse didn't take state aid and raised capital privately.