UBS is being bailed out by the Government of Singapore Investment Corporation (GIC), which is investing CHF11 billion ($9.74 billion), and an undisclosed strategic investor in the Middle East, who is investing CHF2 billion, in the Swiss bank. Both investors will buy mandatory convertible notes bearing a coupon of 9% which are convertible into shares in two years. The proceeds will count as tier-1 capital. The issuance is subject to shareholder approval in February 2008.
Analysts estimate that GIC will have a 9% stake in UBS and the unidentified Middle East investor another 1.5%. GIC will become the largest single shareholder in UBS. It is not yet clear whether the GIC stake comes with board representation.
In addition to the induction of new investors, UBS announced it will re-sell 36.4 million treasury shares previously intended to be cancelled to raise approximately CHF2 billion. It will also replace the 2007 cash dividend with a stock dividend to further boost tier-1 capital by CHF4.4 billion.
The combined effect of the measures announced will be that UBS's regulatory tier-1 capital will be strengthened by around CHF19.4 billion.
UBS is anticipating declaring a loss for the fourth quarter of 2007, as well as a loss for fiscal 2007. Indeed, many analysts had commented that UBS's mid-year cautionary note about the impact of the subprime situation on its portfolio was akin to a profit warning but the quantum of loss announced yesterday still surprised the market.
UBS attributed the situation ôto continued deterioration in the US subprime mortgage securities market, partly driven by increased homeowner delinquencies but mainly fuelled by worsening market expectations of future developmentsö.
In its statement, UBS drew attention to the combination of wealth management, asset management and investment banking that the firm offers terming this ôthe best model to growö. However, remarks by key decision-makers at UBS were ambiguous about the role of investment banking.
Marcel Rohner, group chief executive officer at UBS who replaced Peter Wuffli in July, commented: ôinvestment banking growth initiatives will be expected to earn an appropriate risk-adjusted return on capital over an entire cycle, as well as being synergistic with the rest of UBSö.
Marcel Ospel, chairman of UBS highlighted that GIC was the right choice of partner as Singapore is already a hub for UBSÆs wealth management business and further said: ôWe will make certain that our investment banking operations grow by concentrating on serving the needs of institutional and corporate clients, and on maximising synergies with wealth and asset management."
The UBS announcement comes close on the heels of Citi's disclosure that its subprime-related losses are in the $8-$11 billion range and that Abu Dhabi Investment Authority would acquire a 5% stake to tide the US bank over this crisis.
UBS shares fell sharply by around 3% in early trading then recovered as investors expressed optimism that the worst is over for the Swiss bank.