UBS: Lose a Few Billion, Win a Few Billion

Investors washed down the bitter pill of the bank's second subprime writedown with the news of an infusion of cash from sovereign wealth funds

It was déjà vu all over again for Swiss financial giant UBS on Dec. 10 after the bank announced a second writedown of subprime mortgage holdings in a matter of months, this one for $10 billion. Investors took the news surprisingly well, though, because on the same day UBS (UBS) unveiled investments from the government of Singapore and an unnamed Middle East source that will inject $11.5 billion into the European bank.

Under the agreement, the Government of Singapore Investment Group (GIC), a sovereign wealth fund with more than $100 billion under management, will provide $9.7 billion of capital to UBS through an issuance of convertible notes. That will give GIC roughly a 9% stake in UBS, making it the bank's largest shareholder. The other as-yet unnamed investor—reportedly the government of Oman—will fork out $1.8 billion under a similar agreement.

Closing the Subprime Chapter

These new sources of capital helped deflect attention away from the $10 billion subprime writedown, which comes after a similar $3.4 billion writedown announced in October (, 10/1/07). UBS shares fell 3.5% in Zurich during early trading, but closed up 1.4% for the day as investors were reassured UBS's subprime problems might finally be coming to an end. Shares rose more than 1.8% in early New York trading.

"Given that the capital-raising outweighs the writedown, this appears to be an attempt to draw a line under UBS' subprime woes," says Matthew Clark, analyst at London-based stock broker Keefe, Bruyette & Woods, in a note to investors, adding the move also would help shore up the bank's core wealth management business.

The outside injections aren't the only way UBS is trying to beef up its books. In a partial reversal of its share buyback program, the bank now says it will sell 36.4 million of its own shares held in treasury that were previously destined to be canceled. And it will pay its 2007 shareholder dividend in stock, not cash. The two moves together are expected to raise or save $5.7 billion. UBS also may issue additional shares. Analysts figure these moves, plus the cash injections, will provide sufficient reserves in case further writedowns are necessary in 2008.

In the near term, UBS says the credit crunch also will continue to affect the bank's operating results. The company says it now anticipates an operating loss for the fourth quarter, on top of a $736 million loss in the third quarter—its first quarterly red ink in nine years. The bank also concedes it may suffer a net loss for the year.

SWFs Quadruple Investment in the West

With most financial institutions still licking their wounds from the credit crunch, UBS may have had little option but to turn to government-backed funds to bail it out. Rival Citigroup (C), for example, made a similar move on Nov. 26 in a $7.5 billion agreement (, 11/27/07) with the Abu Dhabi Investment Authority.

Research from Morgan Stanley (MS) shows sovereign wealth funds (SWFs) have already invested $37.6 billion in Western financial assets this year, compared with $9.2 billion in 2006, as SWFs look to snap up underweight stocks (, 11/1/07) that have been hard hit by the credit crunch.

By bringing in wealthy investors, UBS hopes both to reduce its exposure to subprime holdings and to reassure investors who remain jittery after several bearish months in the financial markets. Right now, the extra $11.5 billion-plus is exactly what the Swiss bank needs. It remains to be seen, however, if the investment will be enough to put UBS in the pink in 2008.

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