UBS gets support for capital plan and Ermotti pays from Norwegian fund By Reuters

By Stefania Spezzati

LONDON (Reuters) – Norway's sovereign wealth fund backed UBS's plan to make its Additional Tier 1 (AT1) bonds, a form of debt, more attractive to investors by protecting them from liquidation, and also approved the plan. from UBS CEO, Sergio Ermotti. payment 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 seeking to shore up its capital reserves to meet demands from Swiss regulators as it integrates former rival Credit Swiss.

The move could come at a cost to shareholders, who could see their stakes diluted in a crisis.

AT1 bonds, a type of debt that acts as a buffer if a bank's capital levels fall below a certain threshold, have been encouraged by regulators since the 2008-09 global financial crisis. Bonds can be converted into shares or canceled.

Last year, Swiss regulator FINMA caused a crisis in the $275 billion market when it wrote down about $17 billion of Credit Suisse's AT1 as part of its bailout.

In a sale in November, its first since acquiring Credit Suisse, UBS saw strong demand as it made the terms of the bonds more attractive, including the promise of a conversion into shares in case of trouble.

HIGHER CAPITAL REQUIREMENTS

Following the acquisition of Credit Suisse, “our larger balance sheet and increased market share in Switzerland” will increase the bank's capital needs, UBS told shareholders in the invitation to the annual general meeting.

“Following the redemption of Credit Suisse's AT1 instruments in March 2023,” AT1 investors expect “the possibility of a conversion rather than a pure redemption, a format used by many sector peers,” UBS said, adding that this should also apply for future AT1 sales.

UBS plans to sell up to $2 billion of subordinated debt this year, CreditSights analysts said.

UBS said converting one share of AT1s sold to investors could, in total, see the bank create new shares representing around 20% of 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 intentions five days before its annual meetings. He did not explain the reasons why he supported the UBS vote.

AT1 bonds are the riskiest type of bond a bank can issue and carry higher interest.

In Switzerland, FINMA requires global systemic banks to retain a certain portion of AT1.

In November, UBS issued $3.5 billion in new AT1 and received strong orders by offering 9.25% interest.

The share conversion mechanism is “clearly intended to reassure investors,” said Simon Adamson, head of finance at CreditSights in London.

UBS said it would seek shareholder approval for the conversion to shares if its capital levels fell below a certain level or if a “viability event” occurred, such as receiving extraordinary government support.

Voting advisor ISS also recommended investors vote in favor of UBS's capital plans.

ERMOTTI PAYMENT PACKAGE

The fund said it also supported a remuneration package that includes the salary of UBS Chief Executive Sergio Ermotti. His salary for 2023, which made him the highest-paid CEO of a European bank, sparked criticism in Switzerland.

In the past, Nicolai Tangen, CEO of Norges Bank Investment Management, which manages the fund, has denounced excessive salaries, highlighting executive compensation in the United States.

In a note to investors in April, proxy advisor Glass Lewis said the bank's compensation policies are “sustainable” given the increased responsibilities for Ermotti that come with the Credit Suisse acquisition.

However, he also said that “we are concerned about the magnitude” of the variable pay relative to European peers, and “shareholders should expect a compelling justification supporting the increase.”

The ISS is also in favor of the UBS remuneration package.