UBS Debt Placed Under Review by DBRS Morningstar

Morningstar's credit rating arm DBRS thinks the acquisition of Credit Suisse creates potentially significant risks. 

James Gard 22 March, 2023 | 9:08AM
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UBS bank

UBS, which stepped in to buy stricken Credit Suisse (CS) 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.

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.

Further Reading

• The Credit Suisse Scandal Timeline

• Equity Funds Exposed to CS

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."


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James Gard

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