LONDON (Reuters) - Norway's sovereign wealth fund has backed UBS' plan to make its Additional Tier 1 (AT1) bonds, a form of debt, more appealing to investors by protecting them from a wipeout, and also signed off on UBS CEO Sergio Ermotti's pay package.

The vote from the Norwegian fund, UBS' second-largest shareholder, at the bank's annual general meeting this week is a boost for UBS, which is seeking to prop up its capital buffers to satisfy Swiss regulators' demands as it integrates its former rival Credit Suisse.

The move could come at a cost for shareholders, who could see their holdings diluted in a crisis.

AT1 bonds, a type of debt that acts as a shock absorber if a bank's capital levels fall below a certain threshold, have been encouraged by regulators since the 2008-09 global financial crisis. The bonds can be converted into equity or written off.

Last year, Swiss regulator FINMA sparked a crisis in the $275 billion market when it wrote down about $17 billion of Credit Suisse' AT1s as part of its rescue.

In a sale in November, the first since its takeover of Credit Suisse, UBS saw strong demand as it made the terms of the bonds more appealing, including promising a conversion into shares in case of trouble.

GREATER CAPITAL REQUIREMENTS

After the takeover of Credit Suisse, "our larger balance sheet and greater market share in Switzerland" will increase the bank's capital requirements, UBS told shareholders in the invitation to the annual general meeting.

"Following the writedown of Credit Suisse's AT1 instruments in March 2023," AT1 investors expect "the possibility of a conversion rather than a pure write-down, a format used by many peers in the industry," UBS said, adding this should be applied to future AT1 issuance, too.

It said converting a share of the AT1s sold to investors could, in total, see the bank create new shares representing about 20% of the existing share capital.

The Norwegian fund owned 4.64% of UBS at end of December, according to its website, making it the second-biggest investor after BlackRock.

The fund publishes its voting intention five days before annual meetings. It did not explain its rationale for supporting UBS' vote.

ERMOTTI'S PAY PACKAGE

The fund said it also supported a remuneration package which includes UBS Chief Executive Sergio Ermotti's pay. His salary for 2023, which made him the best-paid European bank CEO, triggered criticism in Switzerland.

In the past, Nicolai Tangen, CEO of the Norges Bank Investment Management which operates the fund, has called out excessive pay, highlighting executives' compensation in the United States.AT1 bonds are the riskiest type of bond a bank can issue and carry a higher interest.

In Switzerland, FINMA requires globally systemic banks to retain a certain portion of AT1s.

In November, UBS issued $3.5 billion of new AT1s, receiving strong orders as it offered 9.25% interest.

It said it would seek shareholder approval for the conversion to equities if its capital levels fell below a certain level or if a "viability event", such as receiving extraordinary government support, occurs.