UBS AG (UBSN) is seeking to unload $1.5 billion in collateralized debt obligations tied to commercial real estate following the Federal Reserve Bank of New York’s sale of similar securities last week.
Bids are due May 9, said Torie Von Alt, a spokeswoman for the bank who declined to comment further. The Zurich-based lender is circulating the list of securities through other dealers, according to three people familiar with the offering who declined to be identified because it’s not public.
The Fed auctioned off $7.5 billion in CDOs backed by commercial mortgages assumed in the 2008 rescue of American International Group Inc. last week, sparking a bidding war between three teams of Wall Street banks. Barclays Plc and Deutsche Bank AG won the portfolio, representing the largest individual trade in the history of the $600 billion commercial-mortgage bond market.
“The fact that the Fed was able to sell into strong demand could probably lead others to strike while the iron is hot,” said Alan Todd, a commercial-mortgage debt analyst at Bank of America Corp.
The winning banks probably paid a price of about 67 cents on the dollar, JPMorgan Chase & Co. analysts said in an April 27 report. That translates into about $5 billion compared with the $4.2 billion valuation the Fed assigned to the portfolio in December, according to the district bank’s website.
Fed Provided Transparency
“The Fed’s auction provided transparency on the depth of demand for this market,” said Leo Huang an investment manager overseeing commercial real-estate debt at Ellington Management Group LLC. “Investors will take comfort that this substantial size of risk cleared and at good levels.”
The CDOs sold by the Fed, dubbed MAX by Deutsche Bank when they were issued in 2007 and 2008, contained securities of varying ratings culled from 103 commercial-mortgage bond offerings. Holdings of about $2.8 billion in so-called AJ commercial-mortgage securities, many of which have been cut to junk after being assigned top grades at issuance, spooked the market on concern that there would not be enough buyers, Citigroup Inc. analysts said in a report last week.
Prices on that type of commercial mortgage debt vary widely, with bonds sold at the market’s peak in 2007 trading at about 65 cents at the start of 2012 before climbing as high as 80 cents prior to the Fed’s announcement, according to Citigroup analysts led by Jeffrey Berenbaum.
The market for bonds backed by loans on everything from skyscrapers to shopping malls had been on hold prior to the Fed’s sale. Commercial-mortgage debt values slid when the Fed said April 4 that it was considering selling assets in its Maiden Lane III portfolio. Relative yields on benchmark securities narrowed by as much as 15 basis points, or 0.15 percentage point, to 225 basis points over the swap rate last week after the sale’s completion, according to the JPMorgan analysts led by Ed Reardon.
The district bank announced the CDO auction on April 18 after receiving “several” unsolicited bids for the holdings.
UBS, facing new requirements from Swiss regulators to bolster its financial strength, is trying to cut assets to reduce risk. The bank has targeted a goal of increasing its capital to 19 percent of assets as calculated under the proposed rules, from about 11 percent at the end of 2011, according to the bank’s most recent annual report.
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