Thursday, May 22, 2008

UBS to Sell Its New Shares at a 31% Discount

I hear on the news all the time that the worst of the credit crisis is over and it should be smooth sailing from here. Allow me to ask you a question. When UBS is selling a new equity issue at a 31% discount does that sound like the credit crisis is over? When the IMF says that banks have only worked through a quarter to a third of their losses does that sound like the credit crisis is over? I suspect there will be another round of balance sheet strengthening for US banks this year. Text in bold is my emphasis. From Market Watch:

Switzerland's UBS on Thursday said it will sell new shares at a nearly one-third discount to raise the 16 billion Swiss francs ($15.6 billion) it needs to strengthen its balance sheet.

The firm, which has been Europe's biggest casualty of the credit crisis, said shareholders will be able to buy seven new shares for every 20 they hold at a price of 21 francs a share. That represents a hefty 31% discount to Wednesday's closing price of 30.64 francs. UBS said at the start of April that it would need to raise the cash after revealing a further $19 billion of write-downs from the credit crisis.

Shares in UBS fell 1.1% in early European trading to 30.30 francs. The stock has fallen 60% in the last year, but is still above its low of 23.05 francs at the end of March as investors are hoping the massive share issue will help draw a line under its credit-crisis losses.

The share issue is the second major capital boost for UBS after an ill-timed focus on U.S. growth saw it increase its exposure to risky mortgage assets shortly before the credit crisis. It previously raised around 13 billion francs from the government of Singapore and an unidentified Middle East investor.

Other fallout from the crisis includes the departure of former chairman Marcel Ospel and plans to cut another 5,500 jobs or roughly 7% of its global workforce, with many of those losses to come in investment banking.

Also on Wednesday UBS said it has completed the sale of around $15 billion or primarily subprime and Alt-A residential mortgage backed securities to a newly-created fund that will be managed by BlackRock Inc.

The fund purchased the securities using approximately $3.75 billion in equity raised by BlackRock from investors and a multi-year collateralized term loan of $11.25 billion provided by UBS.

Yes, I understand that the book of securities cost $15B, but what was it originally worth?

While UBS has taken the heaviest credit crisis losses in Europe, it is far from being the only European bank to ask shareholders for more cash.

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