Saudi National Bank is nursing major losses in the wake of Credit Suisse’s failure after a deal was reached for UBS to buy the embattled Swiss lender for $3.2 billion.

Saudi National Bank — Credit Suisse’s largest shareholder — confirmed to CNBC on Monday that it had been hit with a loss of around 80% on its investment.

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The Riyadh-based bank holds a 9.9% stake in Credit Suisse, having invested 1.4 billion Swiss francs ($1.5 billion) in the 167-year-old Swiss lender in November of last year, at 3.82 Swiss francs per share.

Under the terms of the rescue deal, UBS is paying Credit Suisse shareholders 0.76 Swiss francs per share.

The significant discount comes as regulators try to shore up the global banking system. The scramble for a rescue follows a tumultuous few weeks which saw the collapses of U.S.-based Silicon Valley Bank and First Republic bank as well as major stock price downturns across the banking sector internationally.

Shares of UBS, Switzerland’s largest bank, traded down 10.5% at 9:28 a.m. London time, while Europe’s banking sector was around 4% lower. Credit Suisse was down a whopping 62%.

Saudi shareholder ‘shot themselves in the foot’

SNB’s feeling right now is probably like all shareholders in CS — utter anger that management have let the situation get to this point.

Simon Fentham-Fletcher

Chief investment officer, Freedom Asset Management

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Author’s note: All financial data in this article is presented in Canadian dollars.

Enbridge Inc. (NYSE:ENB), a North American energy transportation and distribution giant is currently finding itself near a 52-week low. Income investors may see the rising dividend yield, now at 7.1%, as a reason to scoop up shares. Interestingly, Enbridge has an extensive offering of corporate debt, and the longest dated maturity of 2083, is currently priced below par and offering a yield of greater than 7.6%. While many high yield investors may not be interested, it’s important to note that Enbridge holds an investment grade credit rating, which typically offers fixed income returns of almost 200 basis points lower.

Enbridge’s operation continued to grow in 2022 with revenues up $6 billion from 2021. The company’s expenses outpaced revenue growth, but that was mainly due to the $3 billion write off of assets and intangibles. Had the write offs not occurred, operating income would have been higher in 2022 than in 2021, but nevertheless, the $5.2 billion in operating income was sufficient to cover the company’s interest expenses.

While earnings of Enbridge looked healthy last year, the balance sheet tells a slightly different story. The business increased its total debt by more than $5 billion and shareholder equity declined by $1 billion. The company did succeed in building up some cash, but its current liabilities are $8 billion higher than current assets. This working capital deficit will likely lead to new debt issuance or refinancing in the next 12 months.

From a cash flow standpoint, debt investors need to see that Enbridge can generate the cash needed to pay down debt. In 2022, Enbridge grew operating cash flow by $2 billion and generated an impressive $6.6 billion in free cash flow. If Enbridge generated so much cash, why did debt increase in 2022? The answer lies in a combination of investing and financing activities. Enbridge invested $2 billion in investments and acquisitions that were not related to capital expenditures. On top of that, the company shelled out $7.3 billion in preferred and common share dividends, and redeemed $1 billion in preferred shares. The culmination of these activities led to the company needing to borrow more than $3 billion. (Note: I believe $2 billion in additional debt was placed on the balance sheet from other investing activities)

Under Enbridge’s current operating structure, additional capital is needed by either borrowing or selling assets to maintain the common share dividends. While the dividends on the preferred shares are very safe, they are actually yielding less than the coupon yield on the 2083 notes. Investors in long-term debt of Enbridge are getting a safer security for more income.

Complicating Enbridge’s future further is the fact that the company has over $14 billion worth of debt maturing over the next 2 years. The need to refinance this debt in a higher interest rate market combined with a working capital deficit is going to put pressure on the dividend. Enbridge may have to choose between its existing dividend and maintaining its credit rating. Fortunately for debt holders, the company does have over $9 billion in liquidity to work with among its existing credit facilities.

Even if Enbridge is downgraded into junk territory, the company’s 2083 notes are still trading at a higher return than the benchmark BB corporate yield. As in any case in life, there is a catch to what may be considered a “too good to be true” trade. These long term notes were underwritten with an automatic conversion covenant. In the event of a bankruptcy or related event of insolvency, the 2083 bonds would be automatically converted into preferred shares. This strange provision is the likely contributor behind the higher return on the notes.

While swings and uncertainties in the energy markets over the next several years could greatly change the risk landscape for Enbridge, I believe the company’s strong free cash flow makes it capable of weathering bear markets. Should the company need additional cash flow, it could reduce common share dividends and not impair the value of its bonds.

Note: These notes are not available with all brokerage sites, but they have been traded in increments as low as $5,000, therefore they are available to retail holders.

CUSIP: 29250NBP9

Price: $99.00

Coupon: 7.625%

Maturity Date: 01/15/2083

Yield to Maturity: 7.63%

Credit Rating: (Moody’s/S&P): Baa3/NR

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The U.S. has reportedly turned to Warren Buffett once more for help in a financial crisis.

The billionaire investor offered lifelines to Goldman Sachs in 2008 following the collapse of Lehman Brothers, and to Bank of America in 2011.

Now, Buffett has been in contact with the White House amid this year’s regional banking crisis, offering advice and guidance but also discussing an investment in the sector, Bloomberg News reported Sunday (March 19), citing unnamed sources.

Federal officials have sought to reassure the public over the past week after two high-profile banking failures: the collapse of Silicon Valley Bank on March 10, followed by the failure of Signature Bank two days later.

In a speech March 13, President Joe Biden told Americans they “can rest assured our banking system is safe. Your deposits are safe.”

That hasn’t kept politicians from both sides of the aisle for proposing tougher action against the banking sector. In that same speech, Biden called for a “full accounting” of what led to the two bank failures.

Later in the week, the top Republican and Democrat on the House Financial Services Committee said they’d scheduled a hearing for later this month to question top officials from the Federal Reserve and Federal Deposit Insurance Corp.

“The House Financial Services Committee is committed to getting to the bottom of the failures of Silicon Valley Bank and Signature Bank,” Republican Patrick McHenry and Democrat Maxine Waters said in a news release. “This hearing will allow us to begin to understand why and how these banks failed.”

Worries about the industry continued late into the week, with a group of 11 large banks banding together to help another regional bank — First Republic of California — with a $30 billion injection.

“Last weekend felt like the wild, wild West,” Charlie Youakim, CEO of payments startup Sezzle, told PYMNTS CEO Karen Webster soon after the SVB failure. “SVB had been around forever, they had a great brand. [Its collapse] is a big shock to me.

Now, he added, there’s a conversation happening across the ecosystem about the future of banking, as they begin to be more diligent about where they keep their money.

“We’ve got a board meeting later this week to go over the set of banks that [Sezzle] works with,” said Youakim. “We’re putting together a report of what these banks look like, their financial stability … because it’s not the case anymore that you can just trust your bank, trust that your money will be safe.”

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