UBS Continues To Shore Up Balance Sheet With $2.4 Billion Bond Buyback

December 4th, 2013 by Trefis Team
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Earlier this week, UBS (NYSE:UBS) announced plans to buyback several of its tier 2 and senior notes through a public tender offer. [1] The bonds UBS is looking to pull out from the market include five CHF, EUR or GBP denominated subordinate bonds and six CHF, EUR, ITL or GBP denominated senior unsecured bonds and will cost the Swiss banking giant roughly CHF 2.15 billion ($2.4 billion).

Quite notably, these bonds are not admissible as tier 2 capital under fully applied Basel III norms. Given the bank’s single-minded focus on fortifying its balance sheet over the last couple of years to meet stringent capital requirement norms, UBSs motive behind the buyback is quite clear – the bank is leveraging its strong capital structure to cut down on debt instruments with relatively high interest rates, which will also contribute towards a better Tier 1 capital ratio once Basel III norms are in effect.

The bank had implemented a similar round of bond buybacks this February, wherein it repurchased several series of USD, EUR and ITL denominated bonds worth CHF 5 billion ($5.5 billion). [2]

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We maintain a $21 price estimate for UBS’s stock which is about 15% ahead of current market prices.

See our full analysis for UBS

Last October, UBS announced a set of sweeping changes to its business model, in which it detailed its areas of focus, capital requirement targets, as well as profitability targets for each of its business units to be achieved over a three-to-five year horizon. [3] Since then, the bank has been hard at work to achieve these targets – meeting or exceeding them in terms of capital requirements. However, operating figures took a back-seat over the period, with margins falling across businesses.

The bank is now looking for ways to improve profitability while ensuring that the efforts it has put into strengthening its capital structure do not get undone. This is where the bond buybacks figure in the bigger picture, as they allow the bank to put its free cash to use in order to bring down its interest expenses. And as the bonds UBS is buying back will not be considered a part of fully-phased in Basel III tier 2 capital, it will only impact the bank’s total capital ratio figure of 21.8% marginally – a figure estimated at between 0.2% and 0.5%.

UBS admits that it will incur a small loss as a result of the buyback. But it expects to more than make up for this within a few months thanks to the corresponding savings in interest paid. You can better understand the impact of reducing interest expenses on UBS’s share value by making changes to the chart above which shows the bank’s net interest yield.

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Notes:
  1. UBS to buy back outstanding bonds in public tender offer, UBS Press Releases, Dec 2 2013 [↩]
  2. UBS to buy back outstanding bonds in public tender offers, UBS Press Releases, Feb 5 2013 [↩]
  3. UBS announces strategic acceleration from a position of strength, UBS Press Releases, Oct 30 2012 [↩]