Where, oh where does this leave UBS?
The Swiss bank announced it was adding $10bn in writedowns on its subprime debt this Q4, with massive emergency capital issues to boot. You can view the statement here.
After a month of obfuscation, UBS has also had the gall to say it’s making this announcement to “create maximum clarity on the issue.”
First, to the writedowns themselves. UBS’ $10bn writedown is based primarily on its CDO book. And it’s primarily on AAA debt. That’s all very dramatic, but here’s what interested us:
UBS has revised key input parameters of the models that are used to estimate lifetime default and resulting losses for sub-prime mortgage pools. As a result of these revisions, UBS will write down its US sub-prime holdings by approximately a further USD 10 billion.
That seems to mean UBS is still marking to model. Only now, even its models are telling it that the debt it holds is toxic. A line drawn, perhaps, under the notion that writedowns, in the final analysis, are academic accounting quirks borne of irrational markets, and not fair value. The UBS statement, in effect, says the opposite:
[UBS models] … reflect the extreme loss projections implied by the prices achieved in the very limited number of observable market transactions in US sub-prime related securities and indices up to the end of November.
Which seems like a very, very carefully-worded way of saying that the CDO market - illiquid and opaque though it is - is trading at fair value.
And so to the consequences. The writedown has placed UBS in a situation where it needs to find more capital - so the news is accompany by a series of rather extreme measures to strengthen the bank’s ratios, including a SFr19.4bn ($17bn) tier-1 capital increase:
SFr13bn new capital SFr11bn placed with the Government of Singapore Investment Corp (GIC), and SFr 2bn placed with an undisclosed strategic investor from the Middle East. Say UBS: “The [mandatory] notes will pay a coupon of 9 per cent until conversion into ordinary shares, which must take place on or before a date approximately two years after issuance.” A massive delayed equity issue then, but it was not immediately clear what stake the Singaporeans will eventually hold.
Sale of Treasury shares SFr2bn will be raised by re-listing 36.4m treasury shares previously intended for cancellation.
2007 scrip dividend Cash dividend scrapped and replaced with SFr4.4bn of stock, of which approximately SFr3.3bn is a reversal of accrued dividend for the first nine months of the year and the balance is dividend that will now not accrue.
