A Clockwork Orange, the 1971 cinematic masterpiece by director Stanley Kubrick, tells the story of a dystopian world, where a gang of youths, intoxicated with drug-laden milk, embarked on an orgy of graphic violence and sex. The movie, based on the 1962 novel by Anthony Burgess, received polarised reviews.
The film was blamed for inspiring copycat acts, and for decades, banned in several countries including Singapore and even the UK, where the story was set. The film was also lauded as yet another masterful work by Kubrick. Despite, or perhaps because of the controversial topics covered and convulsions of violence, A Clockwork Orange achieved a cult following.
Like clockwork, the solution from the country known for its clocks and watches to the Credit Suisse problem was hammered out last weekend. Credit Suisse, already half a year ago as referenced in this column, was beset by a series of trading, investment banking and corporate missteps in the last few years: Luckin Coffee’s botched IPO, losses in its Greensill Capital investment vehicle, and blowups of hedge fund Archegos Capital Management. There was also the bizarre case of former CEO Tidjane Thiam who left in 2020 amid revelations that the bank hired private detectives to spy on former staff.
With things looking shaky persistently, nervous customers literally took their money across the Paradeplatz in Zurich’s traditional banking centre to rival lender UBS. A steady stream of Credit Suisse bankers, including those wielding black books containing lists of clients who have entrusted plenty of As under their Ms. Those who stayed long enough soon hear of how clients withdrew a whopping CHF110 billion ($158.92 billion) in the fourth quarter last year, even as they brace to be among the 9,000 jobs to be cut as part of Credit Suisse’s CHF4 billion recapitalisation plan last October.
The developments at Credit Suisse came at a time when markets were already nervous from a series of bank failures in the US. Especially for investors in Asia, previously unfamiliar names such as Silvergate, Signature Bank, Silicon Valley Bank and First Republic Bank dominated local headlines all of a sudden.
Credit Suisse did not help itself when it acknowledged on March 14 that there was some “material weakness” in its financial reporting. The following day, Ammar Al Khudairy, chairman of Saudi National Bank, Credit Suisse’s single largest shareholder, replied “absolutely not” when asked if he would put in more equity, sending shares tanking. He tried to reverse the damage the following day, saying he hadn’t been asked about putting more equity and that Credit Suisse as it was, was alright.
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In an attempt to shore up confidence, the bank announced in the wee hours of March 16 a buyback of US$2.5 billion ($3.35 billion) of senior debt. Swiss National Bank, the country’s central bank, was also compelled to put together a US$54 billion liquidity backstop and proclaim that “Credit Suisse meets the capital and liquidity requirements”.
This momentarily stemmed the tide of its credit default swap spreads from ratcheting from low double-digits last Monday to 26% with no buyers in sight on the evening of March 15. By March 17, Credit Suisse’s market cap has been hammered to just CHF7.4 billion. In contrast, the market caps of DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank are at several times bigger.
All too starkly, the crisis of confidence was stretching the nerves of investors. Both on the short and long in the equity and CDS, there were many double or nothing trades. Unfortunately for the longs, they were left close to nothing.
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However, there was a non-stop leak in the financial media over the weekend that UBS would be brought to the table to hammer out a deal before the markets opened on Monday. As negotiations and posturing drip-fed into the market, most of Asia went to sleep after watching Arsenal win in the English Premier League.
Yet, like clockwork, a deal was struck around 4am Singapore time on Monday, March 20. The final figure of US$3.3 billion that UBS has agreed to pay was much improved from an initial US$1 billion or CHF0.25 a share that was initially leaked. While Credit Suisse equity holders managed to salvage some, around CHF16 billion worth of additional tier 1 capital bonds will be wiped out. In addition, UBS will receive billions in downside protection and support. Fast and rough in the digital age of finance, the Credit Suisse name, after its violent end, has become part of the history books.
Did UBS, which themselves got CHF11 billion in investment from Singapore’s GIC in the 2008 Global Financial Crisis, get the Credit Suisse franchise on the cheap? With almost mirror overlap in some markets and business lines, can they extract significant returns from the Credit Suisse business by taking out costs if confidence stabilises?
With years of memories trading with/against what was then Credit Suisse First Boston in the 1990s, and with friends in both Credit Suisse as well as UBS — will this be the repeat of Swiss Bank Corp’s reverse takeover of UBS back then?
Perhaps the phoenix will rise from the ashes of what’s now an even more systemically important financial institution. After all, UBS is now not just too big to fail, it is too, too big!
Crisis of confidence
Two years after A Clockwork Orange was released, Tequila Sunrise, a classic track from the Eagles was rolled out. Needing “a shot of courage” after a night nursing tequila, the lonely protagonist sees that “this old world is still the same, another frame”.
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Indeed, in the world of capitalism, successful business bets get rewarded and failed attempts result in them being carried out. The world hasn’t changed with Silicon Valley Bank and Credit Suisse. When confidence and trust ebbs in financial institutions, the sunsets that follow are quick and often spectacular. This does not mean that we immediately switch to the world of DeFi (decentralised finance). One of the “asset classes” that has done relatively well these few weeks in March is Bitcoin.
To some extent FUD (fear, uncertainty and doubt) in the TradFi (traditional finance) world plays precisely to this libertarian narrative. If you cannot trust governments, regulators and grandpas who should be adults in the room, when the systems fail, then you must trust the fully decentralised world of DeFi, where there are none of these impediments to true economic liberty. So, a rally in Bitcoin of about 20% has been predicated on rumours of inflows from fear of traditional banks, as the community rallied its last fervent supporters.
While there may be some new money entering the crypto market of late, it is but a trickle from an industry that has been brought back to earth since the crypto winter started in 2022. Like small-cap stocks, it does not take a lot to move a market, especially when over-speculative activity had already been snuffed out throughout 2022 when DeFi has too had its share of frauds and failures. The difference however is that should Bitcoin or other alt or stablecoins fail — as some already did — no one can really be held accountable as they precisely exist in an unregulated environment.
It is also not true that the public does not get hurt as no taxpayer money is bailing out when these platforms fail. When speculators get pumped up and dumped, losing their shirts and pants, the social burden often falls on governments to pick up the pieces. This is why the Monetary Authority of Singapore continues to be cautious about retail crypto. The question is: How can investors, punchdrunk in low-interest rates and dubious business models, spot turnaround winners and ride with the next phoenix when it rises from the ashes?
Home on a range
Since this column began in September 2021, it has been unabashedly biased toward boring Singapore. One of the central themes was that the pandemic allowed Corporate Singapore to reconsider its business models and pivot to new directions, even if some sectors such as aviation, marine or media were under great stress. The much-maligned mandatory convertible bonds have started to be paid off, as Singapore Airlines, our great way to fly, comes back with higher margins and potentially better market share as it regains pre-Covid highs. Singapore Press Holdings has been privatised with its crown commercial jewels sure to be monetised in some form by the consortium led by tycoon Ong Beng Seng, who fought off the rival bid from the bid led by Keppel Corp.
One of the most exciting transformations that have been highlighted several times in this column is Sembcorp Industries. The clear pivot to renewables announced in 2021 following Wong Kim Yin taking over from Neil McGreggor in 2020, had been telegraphed to the market. Step by step, announcement by announcement, whether it is in sustainable or green financing, or shedding brown assets and new green business announced, the execution has been deliberate and so far, successful, even though with its sprawling geographic reach of business lines and projects, it is quite the titanic to turn around.
As the world ho and hummed over the fears of another financial crisis and geopolitical equity market risk this month, Sembcorp continued to make new highs this March, taking it to a five-year-high. At one point in 2020, Sembcorp and SPH were both deemed the weakest links in the Straits Times Index as both sunk into penny stock levels. While SPH was eventually dropped, Sembcorp Industries was barely clinging on.
Since the pandemic lows of around 80 cents, Sembcorp has returned over fivefold to more than $4, giving the company a market cap of nearly $8 billion. As it gains to new highs, there were some occasional hiccups with accusations of greenwashing which the company’s management has addressed and the share price continued marching up. It now trades at a historical P/E of just over 10 times and as the valuation gap narrows with its global peers, there may be more to come.
Likewise, despite a long and winding road before the completion, the divestment of Keppel Corp’s offshore and marine stake to Sembcorp Marine has created a new company with a new board and management and a refreshed agenda that kicks off in a post-Covid environment.
With a sizeable market cap similar to its former parent company Sembcorp Industries, Sembmarine has already been included in the MSCI Singapore Index on March 2. And with its inclusion in the reserve list of the STI, Sembmarine is potentially back as one of the 30 component stocks of Singapore’s key index. If so, that is a further reason for significant liquidity from institutional investors, never mind the overhang caused by the massive share base of 68.2 billion inflated by the distribution to Keppel Corp shareholders.
Oil prices at healthy levels have translated into a steady stream of orders for rigs meant to explore and produce oil. If the new management can properly integrate the combined entity, and capture better margins as a result, that sets the stage for a turnaround in FY2024. If so, Sembmarine is another phoenix that could emerge. It has been a long and often violent (stock price volatility, and negative news) road to rebase to this juncture. Is this the next sunrise for investors to follow?
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
