It could be another do-or-die moment for Wall Street and global markets on Monday if a giant European bank deal falls through.
Swiss regulators have reportedly helped broker a deal for UBS Group AG to buy rival Credit Suisse AG – an all-share deal worth $1 billion that is expected to be finalized by Sunday evening.
This is according to Sunday’s report financial Timeswhich set the offer price at 0.25 Swiss francs per share, which was well below Credit Suisse’s CS,
Friday closing rate of 1.86 Swiss Franc. Such a deal would mark an end to the days of speculation about what would happen to the beleaguered bank.
Credit Suisse withdraws Bloomberg’s offer informed ofSuffice to say the offer is too low and could result in losses for shareholders and employees.
One possibility is for UBS to buy Credit Suisse and hand over its Swiss operations to an independent entity, The Wall Street Journal informed of on Sunday. The report said that UBS will retain Credit Suisse’s wealth management division, although talks are still ongoing.
Observers said if a deal doesn’t happen, markets could face fresh chaos in a week that will bring a Federal Reserve meeting and potentially more stress on the US banking side.
“Given the current market environment, a collapse of a financial giant like Credit Suisse would easily spook the US markets. The global financial system is now more connected than ever, and current market fears a headwind in Europe will move US markets. kobesi letter editor-in-chief and founder Adam Kobisi told MarketWatch.
Credit Suisse stock has lost 25% in the past week — its worst since the great financial crisis of 2008 — and trades 71% below where it was a year ago. Credit Suisse’s American Depository Receipts rose 7% late Friday, and are down 24% on the week, versus a 1.45 gain for the S&P 500 SPX,
The prospect of a deal comes days after the Swiss national bank last week forced Credit Suisse to provide an emergency credit line of 50 billion Swiss francs ($54 billion), which could be extended for three years amid tensions over the global banking sector. It started with failure. American Bank.
Shares of Credit Suisse hit record lows in recent sessions after its biggest investor said it would not provide further capital and the lender’s chairman acknowledged that wealth management clients continued to abandon the investment bank.
A clause has also been attached that allows cancellation of the deal if its credit default rises by 100 basis points or more, the report said, citing four people close to the position.
In a rush to finalize a deal before markets open on Monday, Swiss regulators are attempting to change a law that allows for a six-week consultation period with shareholders. Given the price tag on the deal, many shareholders expect losses.
Sources told the FT that US officials are also involved in talks for a merger of Switzerland’s two biggest banks, which is seen as the only means of saving Credit Suisse. UK regulators were also involved. The price tag of the deal does not include any additional provision from the Swiss National Bank to push it forward.
Neither the bank, nor the Swiss National Bank nor markets regulator FINMA would comment to the Financial Times.
UBS plans to eventually sell Credit Suisse, representing a third of its business. But the union would still create one of the largest global systemically important financial institutions in Europe – UBS has total assets of $1.1 trillion on its balance sheet and Credit Suisse has $575 billion.
Credit Suisse shareholders have faced a series of scandals that have resulted in five consecutive quarters of losses, and outflows of nearly $100 billion from its wealthy clients in the fourth quarter. The lender acknowledged material financial control problems in its annual report last week.
Kobeissi said to expect “further fuel to the fire” if no deal is reached before the market opens on Monday.
“The current offer of $1 billion for Credit Suisse, which amounts to $0.27 per share, is an 87% discount to Friday’s closing price. This alone is enough to spook investors who now fear their stock is worth much less than previously expected, especially as no other bidder has emerged for Credit Suisse,” he said.
“It’s like JPMorgan’s offer for Bear Stearns in 2008 which was $2/share or a 93% discount. We believe the only solution to prevent panic in the markets and banks is a temporary backstop of all bank deposits in the US by the FDIC. Otherwise, once one bank is saved, the next one is in question,” Kobeissi said.
US federal authorities organized major banks on Thursday to pour $30 billion into First Republic Bank FRC.
And avert a fourth banking collapse after the failures of Silicon Valley Bank, Signature Bank and Silvergate Bank in the past week.
Reading: From the sudden collapse of SVB to the collapse of Credit Suisse: 8 charts showing the turmoil in the financial markets
There is still a Federal Reserve meeting this week for investors. Markets are preparing for the Tuesday-Wednesday policy meeting. Fed funds futures traders now have a 75.3% chance of a 25 basis point rate hike on Wednesday due to inflation concerns.
Reading: What it may take to calm the banking sector tremors: time, and a Fed rate hike.