Monday, December 10, 2007

UBS to Write Down $10B – The Mess Continues

The continuing mortgage problems in the US has caused UBS to write down $10B in addition to the $3.4B they wrote down in October. In addition UBS will receive a $11.5B ejection from Singapore and the Middle East. This is a good review of the machinations firms go through after being forced to re-build their capital base due to very large losses. Text in bold is my emphasis. From Market Watch:

One thing that is seldom discussed in all this talk about losses is the loss of confidence many overseas organizations are going to have with US debt going forward. Since the end of WWII the US has been the premier country when it comes to debt instruments. Admittedly, international investors may be willing to buy US Treasuries, but private bonds hocked by our investment banks, maybe not so much.

Swiss banking giant UBS warned Monday that it will write down the value of its subprime mortgage holdings by a further $10 billion, leading to a loss in the fourth quarter and potentially wiping out all its profits for the year.

In a bid to soothe the bad news, the bank also announced plans for a capital injection of 13 billion Swiss francs ($11.5 billion) from the government of Singapore and an unnamed investor in the Middle East. The plans would give Singapore a roughly 9% stake, making it the Swiss group's biggest shareholder.

"Conditions in the U.S. mortgage and housing markets have continued to deteriorate, and we have updated our loss assumptions to the levels implied by the current distressed market for mortgage securities," said CEO Marcel Rohner in a statement.

"In the last several months, continued speculation about the ultimate value of our subprime holdings -- which remains unknowable -- has been distracting," Rohner added.

"In our judgment these write-downs will create maximum clarity on this issue and will have the effect of substantially eliminating speculation."

The group took a write-down of around $3.4 billion in early October, but warned later in the month that it may have to take more charges if the U.S. housing market deteriorated further.

But on Monday the group said it now expects a loss in the fourth quarter and added it's "possible" that it'll record a loss for the whole of 2007.

"The write-downs and capital raising represent a dramatic u-turn from guidance given by Chief Financial Officer Marco Suter just three weeks ago," said Keefe, Bruyette & Woods analyst Matthew Clark.

Suter had guided investors not to expect big write-downs in the fourth quarter, though Clark noted market conditions have deteriorated since then.

"Given that the capital-raising outweighs the write-down, this appears to be an attempt to draw a line under UBS's subprime woes," he added.

Rohner confirmed that the investment banking arm will focus more on supporting the asset and wealth management units.

UBS' surprise announcement came a day ahead of a planned investor meeting. The group said the cash injection is intended to ensure it maintains a very strong capital base.

"Our losses in the U.S. mortgage securities market are substantial, but could have been absorbed by our earnings and capital base," said Rohner.

"Nevertheless, it is important to always maintain a notably strong capital position to support the continued growth of our wealth management business, which is the largest generator of value to UBS shareholders," he added.

The bank said the Government of Singapore Investment Corp. has agreed to subscribe to 11 billion francs of mandatory convertible notes, with a strategic investor in the Middle East agreeing to subscribe for around 2 billion francs. According to newswire reports, the Middle East investor is believed to be the government of Oman.

The investment is the latest in a string of deals in which Asian investors have poured cash into banks and other institutions in the U.S. and Europe.

In late November the Abu Dhabi Investment Authority gave Citigroup, Barclays, Fortis and Blackstone Group have also recently received investments from the region.

In a bid to further improve its capital position, the group also plans to replace the 2007 cash dividend with a stock dividend through a further issue of new shares and added it will re-sell around 36.4 million treasury shares that it had previously intended to cancel.

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