The chart explaining what Credit Suisse bankers will lose in the UBS takeover
Credit Suisse may not like it, UBS may not like it either, but an announcement is almost certainly coming. Yesterday, the Financial Times said it was coming last night, and if not last night Bloomberg said tonight at the very latest: UBS will likely be acquiring Credit Suisse, and it will be doing so at far below Friday's CHF2.86 closing price.
The Financial Times reports that UBS is offering to pay CHF0.25 for Credit Suisse shares. Credit Suisse is reportedly pushing back against this offer, and is doing so partly because it would hurt employees who hold bonuses in deferred stock.
Just how much employees would be hurt from an acquisition at CHF0.25 is illustrated by the chart below, taken from Credit Suisse's recent compensation report. When deferred cash bonuses and contingent capital awards are excluded, employees at the bank had CHF688m ($745m) of deferred share bonuses at the end of 2022, based on a share price of CHF2.76.
If UBS acquires CS for CHF0.25, the implication is that they would lose all but CHF62m of this. They would also be at risk of losing CHF360m in contingent capital awards if the value of Credit Suisse's common equity tier one ratio (CET1 ratio) falls below 5.125% of its risk weighted assets.
The pain would be felt most acutely by Credit Suisse's 1,500 so material risk takers and controllers - its senior bankers, traders and compliance, risk and accounting professionals. They hold around 50% of its deferred stock and contingent capital. These are the people who will be most feverishly dreading the UBS deal today.
Source: Credit Suisse
The chart also shows that it's not just about losses on deferred bonuses held by Credit Suisse bankers at the end of 2022. Today's imminent annihilation is the culmination of years of pain. Between 2017 and 2021, Credit Suisse's compensation report noted that the "aggregate value of deferred variable compensation awarded has decreased by 63% from their initial grant value, down from CHF 4.7 billion to CHF 1.7 billion." However, based on a share price of CHF2.76 at the end of 2022, the report said the aggregate value of all deferred compensation was down 78% on its initial grant value. - Credit Suisse bankers had already lost around CHF10bn on their deferred bonuses. At a share price of CHF0.25, they would lose 90% of the remainder.
Credit Suisse bankers will therefore be spending this afternoon drowning their sorrows. None more so, maybe, than Michael Klein - whose convertible note will also be worth a lot less than before. It's still not clear what would happen to the CS First Boston plan under a UBS deal. - The carve out was said to be a sticking point last night; UBS reportedly wants to 'dramatically shrink Credit Suisse’s investment bank, so that the combined entity will make up no more than a third of the merged group.'
Nor are historic deferrals all that Credit Suisse bankers stand to lose. In early 2023, the bank also awarded 500 top employees a 'Transformation Award' worth CHF350m, half of which was paid in deferred stock which only vests if the share price is CHF3.82 or higher on December 31, 2025. And some employees received additional retention-focused share based awards of CHF38m in the past few months.
As we've noted before, Credit Suisse bankers who received cash bonuses suddenly look fortunate. So do all those who left for Deutsche Bank and elsewhere. So, too, in fact do all the people who were let go from Credit Suisse and were able to cash out of their deferrals at higher prices.
For the rest, Asian markets open in around 10 hours' time. A deal is likely before then. Unfortunately, it is unlikely to be pleasant.
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