It could be another life-and-death moment for Wall Street and global markets on Monday if a huge deal with a European bank falls apart.
Swiss regulators reportedly helped seal a deal for UBS Group AG to buy rival Credit Suisse AG – a stock deal valued at $1 billion that is expected to be finalized on Sunday night.
That’s according to a Sunday report in the Financial Times, which set the offer price at CHF0.25 per share, well below Credit Suisse’s CS,
Friday closing price of CHF 1.86. Such a deal would end days of speculation about what would happen to the troubled bank.
Credit Suisse backed off the offer, Bloomberg reported, saying the offer is too low and could hurt shareholders and employees.
One possibility is for UBS to buy Credit Suisse and transfer its Swiss operations to an independent entity, the Wall Street Journal reported on Sunday. UBS will retain Credit Suisse’s wealth management division, the report added, although negotiations are still ongoing.
Observers said that if the deal does not go through, markets could face renewed chaos in a week that will bring a Federal Reserve meeting and potentially more stress on the US banking sector.
“Given the current market environment, the collapse of a financial giant like Credit Suisse would easily affect US markets. The global financial system is now more connected than ever, and with current market fears, a headline in Europe will move US markets,” Kobeissi Letter Editor-in-Chief and Founder Adam Kobeissi told MarketWatch.
Credit Suisse shares have lost 25% over the past week – the worst since the great financial crisis of 2008 – and are trading 71% below where they were a year ago. Credit Suisse American Depositary Receipts gained 7% on Friday and lost 24% for the week, versus a 1.45 gain for the S&P 500 SPX,
The possibility of a deal comes days after the Swiss National Bank was forced to provide a CHF50 billion ($54 billion) emergency credit line to Credit Suisse last week amid stress in the global banking sector that began with the failure of three American banks.
Shares in Credit Suisse hit record lows in recent sessions after its biggest investor said it would not provide more capital and the lender’s chairman admitted that wealth management clients continued to leave the investment bank.
it also attached a clause that allows the deal to be voided if defaults rise by 100 basis points or more, the report said, citing four people close to the situation.
In the rush to close a deal before markets open on Monday, Swiss regulators are trying to change a law that allows for a six-week consultation period with shareholders. Many shareholders are expected to be left with losses, given the price of the deal.
Sources told the Financial Times that US officials were also involved in talks to merge two of Switzerland’s biggest banks, seen as the only way to save Credit Suisse. UK regulators were also involved. The deal price also doesn’t include any extra Swiss National Bank provisions to boost it.
Neither the bank, nor the Swiss National Bank, nor market regulator Finma have commented to the Financial Times.
UBS is planning to make Credit Suisse account for a third of its business. But the merger would still create one of the largest systemically important global financial institutions in Europe – UBS has $1.1 trillion in total assets on its balance sheet and Credit Suisse has $575 billion.
Credit Suisse shareholders faced a series of scandals that resulted in five consecutive quarters of losses and outflows of about $100 billion from its wealthy clients in the fourth quarter. The lender admitted material financial control issues in its annual report last week.
Kobeissi said that if a deal is not reached before the market opens on Monday, expect “more fuel on the fire.
“Credit Suisse’s current $1 billion offer, which is $0.27 per share, is an 87% discount to Friday’s closing price. That alone is enough to scare off investors, who now fear their shares are worth significantly less than they previously expected, especially as no other bidders have emerged for Credit Suisse,” he said.
“This is very similar to JP Morgan’s offer for Bear Stearns in 2008, which was $2/share or a 93% discount. We believe that the only solution to stop the panic in markets and banks is a temporary protection of all US bank deposits by the FDIC. Otherwise, once one bank is saved, the next one comes into question,” said Kobeissi.
US federal authorities on Thursday organized major banks to inject $30 billion into First Republic Bank FRC,
and avert a fourth banking meltdown, following the failures of Silicon Valley Bank, Signature Bank and Silvergate Bank last week.
To read: From the sudden collapse of SVB to the aftermath of Credit Suisse: 8 charts show turmoil in financial markets
Still ahead for investors this week is a Federal Reserve meeting. Markets are gearing up for the Tuesday-Wednesday policy meeting. In federal funds futures, traders now see a 75.3% chance of a 25 basis point rally on Wednesday due to inflation concerns.
To read: What it may take to calm banking sector jitters: time and a rate hike from the Fed.