Operational Re IV cat bonds redeemed following UBS acquisition of Credit Suisse

As broadly anticipated in the market, the $217.25 million of operational risk catastrophe bond notes  issued by Operational Re IV Ltd. have now been redeemed, following the acquisition of the beneficiary of the protection, Credit Suisse, by rival UBS.

The operational risk catastrophe bonds issued early in 2023 were the latest iteration of an arrangement that served as a vehicle to channel capital market investor funding of operational risk insurance to benefit investment bank and asset manager Credit Suisse.

The Operational Re cat bonds provided Credit Suisse with broad insurance protection for a range of operational risk exposures and funded part of an insurance agreement with carrier Zurich.

The fourth securitization of operational risk, the Operational Re IV deal, provided $217.25 million of cover across four tranches of notes.

Now, all four tranches have been redeemed and we’re told the insurance policy underlying them had not been novated across to UBS from Credit Suisse, so this had been anticipated by holders of the notes.

As we reported last March, Credit Suisse had been subjected to a forced sale to its Swiss rival bank UBS as the ripple effects of a banking crisis made the firm’s independence untenable.

While the move caused a write-down of Credit Suisse’s AT1 capital securities, this wasn’t seen as an event likely to trigger the Operational Re IV cat bond notes.

At the time, the thinking in some quarters had been that the Operational Re cat bond coverage could be novated across to UBS.

But, we’re told that the insurance policy wasn’t novated and as a result, this redemption has come at the end of the first annual risk period for the notes.

Sources say that this was inevitable, as why would UBS have continued paying a coupon to noteholders when the insurance protection was no longer relevant from the underlying policy.

Will we ever see another operational risk cat bond? It remains to be seen.

They had been successful, in terms of bringing capital from institutional markets to support a significant operational risk insurance policy.

But, the terms of the cat bond coverage were never an exact match for the underlying insurance, which had made the benefits a little harder to measure.

As well as the protection though, the Operational Re cat bond also served to reduce the risk-weighted assets of Credit Suisse, so there was a regulatory capital benefit in play as well, which made them attractive. That also drove the early redemptions of most of the issues, on their renewals, as the capital benefits tailed off over the life of the Operational Re note vintages, we understand.

We are told that at least some of the team behind this arrangement at Credit Suisse have moved across to UBS. So it is possible we could see that bank look to secure efficient capital to underpin its operational risk insurance needs from the capital markets in future.

We are told that UBS has a robust operational risk framework in place, including sophisticated hedging of its market and investment operations. So a capital market backed solution could be appealing to the company.

You can read about all four of the Operational Re catastrophe bonds sponsored by Zurich Insurance for the beneficiary of coverage Credit Suisse in our Deal Directory.