(Bloomberg) -- The strong demand for UBS Group AG's sale of loss-absorbing debt this week is a signal that investors are moving on from the crisis unleashed by the rescue of Credit Suisse earlier this year, according to Chief Executive Officer Sergio Ermotti.
The $36 billion of orders for the issue of additional tier 1 bonds on Wednesday is “one of the highlights” since UBS agreed to take over its local rival in March, Ermotti said at the Bloomberg New Economy Forum in Singapore on Thursday. Investors in Credit Suisse's AT1 debt saw the value of their assets reduced to zero as part of the government-backed deal.
“People are slowly but surely recognizing that that event in March was an idiosyncratic event,” Ermotti said. Although the asset class was seen for a while as “un-investable,” it remains “loss-absorbing capital that has very attractive terms,” Ermotti said.
Read More: UBS Storms AT1 Market With First Sale Since Credit Suisse's Fall
At least two investors who suffered losses after the writedown in March AT1 holdings put in orders for the UBS deal, Bloomberg reported earlier.
The new issuance will bolster UBS's AT1 capital structure — an important buffer that helps banks comply with core capital requirements without relying solely on more expensive equity. To make the securities more palatable to investors, UBS changed their structure.
The notes now contain a mechanism that would allow them to be converted into equity once the existing shareholders agree to the move. The new design sets them apart from the Credit Suisse AT1 notes that had a complete loss imposed by the Swiss authorities when they engineered the takeover by UBS.
Big Demand
That event triggered the biggest daily loss in the market's history, and sent yields soaring above 15% for the first time, according to a Bloomberg index. The March wipeout happened after a last-minute tweak to Swiss law allowed the writedown to go ahead.
“People understand that the AT1s are a very important element of our capital stack,” Ermotti said. “We are accommodating a big demand for hybrid fixed income, but at the same time it's very beneficial for our shareholders.”
Ermotti, who led Switzerland's biggest bank from 2011 to 2020, was brought back in March to oversee the takeover. UBS on Tuesday reported stronger-than-expected client inflows in its wealth-management business, boosted by the first signs of stabilization at Credit Suisse as it carries out an expensive and complex integration of its former rival.
Read More: UBS's Ermotti Targets More Billionaires After Credit Suisse Deal
Higher interest rates have led clients to shift assets toward bonds generally, Ermotti said Thursday. The trend reflects both “risk aversion but also the attractiveness of fixed income,” he said.
Commenting more broadly, Ermotti said he doesn't see how central banks can bring inflation back to its target without creating a downturn, adding he was in the “higher-for-longer camp.”
When looking at risks in the private sector, commercial real estate is possibly facing the biggest test in the current environment, according to the chief executive. “Covid has changed the way people work,” and the sector “has to be watched carefully,” Ermotti said.
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--With assistance from Tasos Vossos, Harry Suhartono, Chanyaporn Chanjaroen, Derek Wallbank and Joyce Koh.
(Adds further comments, context from fourth paragraph.)
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