By Yoruk Bahceli and Akriti Sharma
(Reuters) - UBS Group said on Wednesday it would buy back 2.75 billion euros ($2.96 billion) worth of debt it sold just days ago in a bid to boost confidence among bondholders rattled by its $3 billion rescue of rival Credit Suisse.
UBS' takeover saw holders of Credit Suisse's Additional Tier 1 bonds getting written down to zero while shareholders will receive some UBS stock, an unusual move that sees stock owners benefiting from better terms.
UBS is buying back its own bonds at the price at which they were sold on March 9 prior to the Credit Suisse deal rather than at market prices, compensating investors after a sell-off this week.
"They're trying to be friendly to investors who purchased just before the mess," said Jerome Legras, head of research at Axiom Alternative Investments, a fund which owned Credit Suisse AT1 bonds.
UBS in a statement said it was buying back a 1.5 billion-euro 4.625% fixed-rate note due March 2028 and a 1.25 billion-euro 4.750% fixed rate note due March 2032.
The notes are loss-absorbing senior unsecured bail-in notes.
Credit rating agency S&P revised its outlook on the holding company of UBS, the issuer of the bonds, to negative from stable on Monday, reflecting pressure on creditworthiness linked to the Credit Suisse deal.
Moody's (NYSE:MCO) cut its ratings outlook across UBS' entities to negative, while Fitch placed them on "watch negative".
UBS shares and bonds have seesawed this week as investors assess the impact of the Credit Suisse deal.
On Monday the shares fell by as much as 17% only to close 35% higher than those lows on Tuesday. UBS bonds also tumbled, with its AT1 debt taking a big hit in particular on Monday.
Credit Suisse AT1 bondholders weren't compensated, which the bank's AT1 prospectus spelled out could happen in Switzerland, but markets were still surprised, being used to seeing bondholders rank higher than equity holders who are to receive the value of the share offer.
The prices of the bonds UBS is buying back on Wednesday had also tumbled but partially recovered on Tuesday.
They rallied further following Wednesday's announcement. The price of the March 2032 bond was up just under a point on the day as prices on both bonds rose near to the levels UBS is offering to pay bondholders, Tradeweb data showed.
"The issuer has decided to launch this exercise as a result of a prudent assessment of these recent developments and the issuer's long-term commitment to its credit investors," UBS said in its statement.
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The buyback was "fair" given the market volatility since the bonds were sold, a banker involved with the sale of the bonds said, speaking on condition of anonymity.
UBS shares closed down 3.7% at 18.71 Swiss francs ($21.05), having risen as much as 3.6% earlier.