By Stefania Spezzati
LONDON (Reuters) – Norway’s sovereign wealth fund has backed UBS’s plan to make its Additional Tier 1 (AT1) bonds, a form of debt, more attractive to investors by protecting them from a wipeout, and also endorsed the proposal UBS CEO Sergio Ermotti salary package.
The vote by the Norwegian fund, UBS’s second largest shareholder, at the bank’s annual general meeting this week is a boost for UBS, which is trying to shore up its capital reserves to meet demands from Swiss regulators as it integrates its former rival Credit Switzerland.
The move could come at a cost to shareholders, who could see their holdings diluted in a crisis.
AT1 bonds, a type of debt that acts as a shock absorber if a bank’s capital levels fall below a certain threshold, have been encouraged by regulators since the 2008-2009 global financial crisis. Bonds can be converted into shares or cancelled.
Last year, Swiss regulator FINMA triggered a crisis in the $275 billion market when it wrote down about $17 billion of Credit Suisse’s AT1s as part of its bailout.
In a November sale, its first since its acquisition of Credit Suisse, UBS found strong demand as it made the terms of the bonds more attractive, including the promise of a conversion into shares if problems arose.
INCREASED CAPITAL REQUIREMENTS
After the Credit Suisse acquisition, “our larger balance sheet and increased market share in Switzerland” will increase the bank’s capital requirements, UBS told shareholders in its invitation to the annual general meeting.
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“Following the write-down of Credit Suisse AT1 instruments in March 2023,” AT1 investors expect “the possibility of a conversion rather than a pure write-down, a format used by many industry peers,” UBS said, adding that this should also apply to future AT1 emissions.
The conversion of a portion of the AT1s sold to investors could, in total, lead the bank to create new shares representing approximately 20% of the existing share capital.
According to its website, the Norwegian fund owned 4.64% of UBS at the end of December, making it the second largest investor after BlackRock (NYSE:).
The fund publishes its voting intention five days before its annual meetings. He did not explain his reasons for supporting UBS’s vote.
ERMOTTI’S PAY PACKAGE
The fund said it also supported a compensation package that includes the pay of UBS Chief Executive Sergio Ermotti. His salary for 2023, which made him the highest-paid European bank chief executive, sparked criticism in Switzerland.
In the past, Nicolai Tangen, CEO of Norges Bank Investment Management which manages the fund, had denounced excessive compensation, highlighting executive salaries in the United States. AT1 bonds are the riskiest type of bond a bank can issue and carry a higher interest rate.
In Switzerland, FINMA requires global systemic banks to retain a certain amount of AT1.
In November, UBS issued $3.5 billion of new AT1s, receiving large orders as it offered 9.25% interest.
It said it would seek shareholder approval to convert to shares if its capital levels fell below a certain level or if a “sustainability event” occurred, such as receiving extraordinary support from the government.
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