R. Christopher Whalen
Oct 2, 20236 min
October 2, 2023 | Premium Service | The Financial Times carried an important article Friday about UBS AG (UBS) subsidiary Credit Suisse unwinding its relationships with Apollo Global Management (APO). We explore the implications of this split for the world of secured finance and mortgage servicing rights (MSRs) in particular below. Always must read the Saturday press.
UBS is seeking to reassure investors that buying Credit Suisse isn’t going to land it in a similar morass of regulatory probes and scandals, the Wall Street Journal reports. Yet the US mortgage business of Credit Suisse may be another pain point that has been overlooked by investors and the media. Notice that the WSJ report never mentions the US mortgage business of UBS.
The litigation section of the most recent Credit Suisse financial report goes on for eleven pages, but does not mention the latest developments. A full DOJ investigation into Russia-related sanctions reportedly is underway at Credit Suisse, and UBS was being probed too, Bloomberg reported last week. UBS denies the report and says that the banking giant is reducing its exposure to Russia.
Over the weekend, UBS unit Credit Suisse announced a settlement to the decade old “tuna bond” scandal, which involved the alleged theft of hundreds of millions of dollars in loan proceeds and the collapse of the nation’s currency.
“Credit Suisse has reached an 11th-hour out-of-court settlement with Mozambique over the decade-old $1.5 billion-plus "tuna bond" scandal, the Swiss bank's new owner UBS said on Sunday,” Reuters reports, “drawing a line under a damaging dispute it inherited.” All's well that ends.
Readers of The IRA are aware that over the past decade, Credit Suisse was one of the more significant players in the US mortgage market until the Archegos failure blew up last year. The bank had a significant presence in the market for financing Ginnie Mae mortgage servicing rights (MSRs), a role that no other US bank was willing to take up.
Eventually, the investment bankers in the special products group of Credit Suisse were sold to a newly created portfolio company of Apollo Global Management (APO) known as Atlas SPG. Click the link below to read our past notes on APO:
https://www.theinstitutionalriskanalyst.com/search?q=Apollo
Credit Suisse owns a substantial Ginnie Mae MSR that so far the bank has been unable to sell. It also owns Select Portfolio Servicing, the largest private label residential loan servicer in the US. Credit Suisse reportedly rejected three bids proffered on the $37 billion in UPB of mostly non-agency mortgage servicing rights, according to Inside Mortgage Finance. The SPS unit may now include the Ginnie Mae MSR among the assets listed, one reason it is difficult to sell.
Here is the disclosure from Credit Suisse released last week.
“In 6M23, we reported negative net revenues of CHF 1,275 million compared to net revenues of CHF 437 million in 6M22. The decrease in net revenues primarily reflected CHF 1,527 million of fair valuation adjustments reflecting changes in exit strategies and principal markets as well as changes of intent in connection with UBS’s plans and intentions for underlying positions or portfolios, mainly within our rates, securitized products, corporate loans and life finance portfolios. The decrease also included a loss of revenues from businesses transferred from the Investment Bank and losses on the valuation of certain financing arrangements associated with the Apollo transaction. These decreases were partially offset by a gain from the Apollo transaction of CHF 726 million in 6M23. In 6M22, net revenues included a loss of CHF 521 million on the equity investment in Allfunds Group.”
The table above from the 06/30/2023 Credit Suisse financial reports includes references to the Archegos event, which arguably led to the sale of the bank. Reading through the intentionally vague disclosure, it appears that Credit Suisse is taking back control of some of its servicing assets from APO. We assume it includes the entire servicing book that was not sold last year, including the problematic Ginnie Mae MSRs and related advances on these assets. Also, UBS reportedly has a small legacy HECM financing business acquired with Paine Webber.
In the first six months of the year, Credit Suisse completed the sale of a significant part of SPG to entities and funds managed by affiliates of Apollo. Credit Suisse and Apollo entered into various ancillary agreements related to the transaction, including an investment management agreement, certain financing arrangements and a transition services agreement. APO acquired certain assets and agreed to manage other assets.
Significantly, the Cayman Island branch of Credit Suisse reportedly provided a large LT credit line to Atlas SPG as part of the sale. CS had previously provided a credit line to support a number of Ginnie Mae MSR financing deals in the bond market, financings that have only been partly supported by Atlas SPG since that time.
Suffice to say that APO has neither the capacity nor the appetite to take on the exposures previously supported by Credit Suisse. Apparently UBS is not interested in the Ginnie Mae MSR business either.
“The sale of Bank assets to certain entities of Apollo and related financing provided by the Bank to these entities represent asset-backed financings where the Bank has continuing involvement,” Credit Suisse disclosed last week. The net exposure of the SPG group is now sub-$20 billion vs $74 billion a year ago.
“In 3Q23, management decided to exit certain loan portfolios held in the NCL, which will result in a reclassification of these loans from held at amortized cost to held-for-sale and an expected loss in 3Q23 of approximately USD 1.6 billion, Credit Suisse disclosed. “In addition, a decision was made to wind down certain management arrangements, which may result in a loss of up to USD 0.6 billion in 3Q23.” This apparently refers to the APO relationship.
There are two takeaways from this latest disclosure from Credit Suisse. First, the US servicing assets are being retained in the Non Core and Legacy (NCL) business unit. It is safe to assume that as time goes forward, these assets will cost UBS more money. Specifically, UBS will have a continuing financing role in the assets sold to APO and Atlas SPG. Credit Suisse:
“The Bank may have continuing involvement in the financial assets that are transferred to an SPE, which may take several forms, including, but not limited to, servicing, recourse and guarantee arrangements, agreements to purchase or redeem transferred assets, derivative instruments, pledges of collateral and beneficial interests in the transferred assets.”
Credit Suisse continues to hold significant on-balance sheet residential loan assets and servicing, and other assets, all this in addition to $260 billion in off-balance sheet exposures in SPEs. The bank indicates that the NCL assets are likely going into a separate SPE unit as well, but UBS will ultimately pay the cost of remediation.
UBS ultimately seems intent upon running off the remaining US mortgage assets, including a few billion in exposures on Ginnie Mae MSR financings that cannot be sold. Think of the US subprime and government mortgage business as the last remnants of the old world of mortgage lending. This is one reason why prospective buyers would not pay par for the related advances from the bank on the Ginnie Mae MSRs financed by customers.
Bottom line: The US mortgage business of Credit Suisse will not be a LT obstacle to UBS in achieving dominance among the global private banks, the group we refer to as the asset gatherers. It may, however, be the source of significant losses and also operational, headline risks. The bank charged off $130 million in restructuring costs for NCL through June 2023 and we suspect there will be a good bit more to come.
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