UBS to Become UMBS

Good afternoon, 

OPEC+ agreed to keep oil production at current levels, NZ wants Google and Meta to pay for news, and America is back in Venezuelan oil as Chevron takes over operational control of its key oil-processing facility this week. Meanwhile, SBF misplaced billions of dollars sent to Alameda and South Dakota banned TikTok.  

Let’s dive in.

Bottom Line Up Front

• It’s the era of the degenerate bond gambler, as retail investors who have been burned by other assets are turning to debt. One trader went as far as to send Bed, Bath and Beyond a formal letter on how to restructure its debt (Letter)

• Slack CEO Stewart Butterfield will step down in January. He will depart alongside two other veteran Slack executives, shaking up the Salesforce division that was acquired in July 2021 for $27B+ (NYT)

• Vans and Supreme’s parent company, VF Corp., fell the most in more than two years after announcing the retirement of Chairman and CEO Steve Rendle (BBG)

• The FTC is probing several crypto firms over allegations their advertisements were deceptive or misleading (Decrypt)

• Evercore plans to elevate George Ibrahim to lead its equity syndicate effort, succeeding Jay Chandler. The transition is said to happen in January, given the change is not yet wasn’t public at the time of the anonymous tip (BBG)

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Deep Dive: UBS Rival to Become UMBS

Credit Suisse’s shares rose yesterday on the prospect that Saudi Arabian Crown Prince Mohammed bin Salman will take a stake in the Swiss firm’s planned investment bank spin out. Here’s what we know. 

Mohammed bin Salman is infamously nicknamed “MBS” or, as he’s more commonly known, “sugar daddy who bought each Saudi soccer player a Rolls-Royce for the win over Argentina.” He’s no stranger to throwing oil money to paper over Saudi news that is, should we say, less favorable for the brand he’s attempted to peddle since he took power. 

This line of thinking would suggest Credit Suisse’s spin-off investment bank, First Boston, is that next fabricator. 

The WSJ broke the news yesterday that MBS may be keen on one of the many departments Credit Suisse is spinning off to avoid bankruptcy. In this case, it's the investment bank First Boston that MBS reportedly has his eye on.

So what’s he buying now

For more history on First Boston and its leadership, or analysis of the spinoff, you can see our previous coverage on the matter. As a refresher, just over a month ago, Credit Suisse’s default was over double that of arch-rival UBS.

In recent weeks, Credit Suisse has lost around 10% of assets it held or invested for customers in its wealth-management arm due to worries about its financial health. Sadly for CS, that’s its largest arm. The bank is cutting thousands of jobs and shedding parts of its investment bank and markets businesses to stabilize earnings.

Credit Suisse hoped that spinning off its profitable arms could buy them some time, at the very least. For First Boston, its selloff could fund retention payments for managing directors in the bank’s strongest areas, like consumer staples and materials. More crucially, this would let Credit Suisse offer out-performers private stock in a focused dealmaking unit, rather than the struggling mothership. 

But this is where it gets interesting. The firm that’s reportedly leading this restructuring? Yea, it’s Saudi Arabia.  

Gulf investors, including Abu Dhabi’s Mubadala and Saudi Arabia’s Public Investment Fund, planned to put money into Suisse’s carved-out advisory and underwriting units. The Public Investment Fund owns 37% of the Saudi National Bank, which last month invested $1.5B in Credit Suisse (a ~9.9% stake). All of a sudden, Saudi Arabia is now one of the bank's biggest shareholders.

Credit Suisse CEO Ulrich Körner recently confirmed First Boston wants to expand in Saudi Arabia, even poaching many of its equity and debt capital markets bankers in Europe. The Saudi National Bank chairman said that he "likes'' Credit Suisse's new leadership. The break off’s appointed leader is the man formerly poised to be Citigroup’s CEO, Michael Klein.

What would an investment look like 

Reports cite MBS may put about $500 million into the vehicle. Other investors may include former Barclays CEO Bob Diamond’s Atlas Merchant Capital. Due to the early stage of reporting, it remains unclear whether the Crown Prince’s interest would come in a personal capacity or through other investment vehicles in the Kingdom. 

The Saudi National Bank is already an anchor investor in Credit Suisse’s $4 billion ongoing capital raise. A further investment by the oil-rich nation would boost confidence in the lender’s restructuring efforts. Bank executives have already said several parties are interested to invest in the First Boston brand under veteran dealmaker Michael Klein.

Credit Suisse has been eager to put to rest concerns about its financial position after more than $8 billion in losses over the past two years and some recent client defections. Any outside investors in First Boston, even if Saudi money, would reduce the capital the Swiss bank would have to dedicate to the unit in a years-long process of carving it out. 

So what does MBS get out of it, or what is his strategy here? To figure that out, let’s look at some of his other recent major investments.

What is this dude thinking 

By now you’ve probably heard about the Line… as well as the mountain city Trojena and Oxagon. 

If you haven’t, congratulations, there may be hope for your Twitter algorithm after all. The Line, Trojena and Oxagon are Saudi Arabia’s three new cities it hopes will host “will host the world's most progressive urban communities.” Cool.

You might now be wondering: Who is going to pay for these Black Mirror “utopias”?

They’re all part of a $500 billion plan that’s already been in motion for five years.

“Vision 2030” is MBS’ now infamous plan for Saudi Arabia to diversify away from crude, loosen social restrictions and boost foreign investment. In 2018, the Crown Prince met with Google, Apple and the Valley’s top investors. MBS’ brand value in his networking ability and marketability clearly haven’t been tainted much. 

In April, MBS met with private equity investors and construction suppliers in New York seeking investment for his new city. By August, Google partnered with a Saudi Arabian startup accelerator to help convince more than 100 international startups to set up headquarters in the kingdom.

But, construction progress so far is mostly limited to earthworks. Investments seem to be slow to come. And, in 2020, a relocation process of local residents to make way for the Line turned violent and ended in arrests.

Can MBS pull either of the capital infusions off?

When you do a refinancing, there are only two outcomes: markets see it as successful and mark shares higher; or they merely see heightened concerns and mark shares down. The latter is the markets' vote on Credit Suisse.

Credit Suisse 5-year Credit Default Swaps just rose again to 449bps. As a fear-mongering reminder, Lehman swaps were at 610bps days before its collapse. 

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