UBS eyes loss-absorbing capital bond

LONDON, Feb 7 (IFR) - UBS could issue a loss-absorbing capital bond, the Swiss bank said in its 2011 full-year results and has starting arranging a series of self-led investors meetings in Asia and Europe.

"UBS also intends to issue loss-absorbing capital in 2012 as a step towards meeting the Swiss regulator's requirement that systemically important banks hold up to 19% in total Basel III capital in future," the bank said in its full-year results this morning.

UBS's chief financial officer Tom Naratil told journalists at a press conference today that UBS would issue loss-absorbing capital to meet tough new Swiss capital rules fairly quickly, and that it still preferred non-dilutive forms of capital such as write-down debt over contingent convertible bonds, or CoCos.

"Our expectation is that UBS will do something similar to Credit Suisse: a perpetual non-call five year with distribution very much skewed toward Asia and also Europe," said Mirko Santucci, head credit at asset manager Swisscanto.

"The question here is whether the structure will convert into equity or whether it will be a write-down. We would prefer to see a transaction that converts into equity."

There are market rumours of a USD1bn deal.

The Swiss financial regulator FINMA has already set out capital standards for the banking sector, in contrast to the rest of Europe which is still waiting for the final version of Basel 3 under CRD4, which is not expected until the summer

Credit Suisse was the first Swiss bank to test investors appetite for contingent capital in February 2011 when it privately sold CHF6bn Tier 1 Buffer Capital Notes, or so-called Cocos to strategic investors Qatar Holding and The Olayan Group.

It also sold publicly USD2bn Tier 2 of Buffer Capital Notes that convert in equity if the bank breaches a Core Tier 1 trigger of 7%.

Santucci added he expected any deal to have an "8% (coupon) in front, or maybe more." "The market conditions are very different from when Credit Suisse did its deal last year and Credit Suisse which priced with a 7.875% coupon is now trading with 8% in front."

Triple A rated Zuercher Kantonalbank priced the first public new style hybrid Tier 1 issue in Europe in January when it sold a CHF590m perpetual non-call 5.5 year issue via itself and UBS for the perpetual non-call 5.5-year deal.

Under the terms of the ZKB deal, not only are the coupons fully discretionary, non-cumulative and do not step-up, but investors can incur a permanent loss on some of their investment if the bank breaches a 7% Common Equity Tier 1 ratio.

Aside from ZKB, Rabobank is the only European bank to have tested investor appetite for permanent write-down structure in the context of a new issue. It sold a USD2bn perpetual non-call 5.5 year Additional Tier 1 issue in November last year in which in which the principal can be written down permanently on a pro rata basis when an 8% equity capital ratio is breached.

The principal is reduced to the amount necessary to bring the bank back to health. The trigger is well above that set under CRD 4 for loss absorption, which was 5.125%. Rabobank's 8% ECR is estimated to equal approximately 6.7% Core Tier 1. (Reporting by Helene Durand, Editing by Alex Chambers)