UBS plans to sell more loss-absorbing bonds to meet tougher bank capital rules after the Swiss bank tested investor appetite for these new instruments with an initial $2 billion deal last week. The new bonds are designed to help bolster the bank in tough times by absorbing losses. Their value can be written down if the bank's common equity Tier 1 ratio - a measure of financial strength - falls below 5 percent.
UBS's deal attracted $5.5 billion of demand from investors, which UBS said included private banks, long-only asset managers, hedge funds and banks investing for their own portfolios, in Asia and Europe.
The bank has maintained it is happy with the issue's reception, but the take-up highlights that UBS has struggled to make the issue attractive to the big institutional investors the bank will have to tap if it is to sell these bonds in bulk.
It needs to sell roughly $16 billion in total of capital instruments, measured by its target for risk-weighted assets, to meet new capital rules.
"(The) 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.
The bank is weighing issues in other regions and currencies for upcoming issues, which are likely to exceed $1 billion in size, he said.
But institutional investors are concerned that the loss-absorption features of these bonds potentially put them behind equity investors in creditor rankings.
"From an investor point of view, there is no option, no potential recovery. You end up being subordinated to the equity," said Roger Doig, credit analyst at Schroders. 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 and a further $2 billion of CoCos publicly. These bonds aim to absorb losses by converting to equity under certain conditions.
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