Thursday, May 22, 2008

UBS set to finance $15bn securities carrier

(FT) UBS, the biggest European casualty of the US subprime turmoil, on Wednesday disclosed it would fund three-quarters of the new special investment vehicle on to which it has offloaded $15bn of troubled credits.

The terms of the sale of securities to BlackRock, the US fund manager, show the extent to which investment banks need to shift stricken mortgage-backed securities off their balance sheets, even if it means retaining a substantial exposure.

The Swiss bank said this month it had agreed to sell BlackRock securities with a nominal value of $22bn in a deal reducing its portfolio of troubled holdings and releasing capital.

But UBS revealed on Wednesday that BlackRock had raised $3.75bn in equity from investors to buy the paper, with the remaining $11.25bn coming from a loan from the bank itself.

The deal is being watched by rival banks for signs of appetite among investors for mortgage-backed securities, which have plunged in value as a result of the turmoil in the credit markets.

“A lot of investors have lost patience with banks saying: ‘We’ll hold these assets to maturity’,” said Matthew Clark, analyst at Keefe Bruyette & Woods. “Investors want to see banks managing their concentration risk and getting back to running the business.”

UBS said the deal would reduce risk-weighted assets and consume less capital. This is because UBS has effectively insured itself against a deterioration in the credit markets, and will only suffer a further loss if the value of the portfolio falls by more than $3.75bn.

Contrary to initial expectations, the bank will not, however, have a direct equity stake in the new vehicle.

UBS said the assets being transferred comprised in roughly equal measure subprime and Alt A paper, along with a small but unspecified amount of prime-rated securities. The move should almost half the group’s subprime and Alt A holdings, disclosed at $15.6n and $17.1bn, respectively, at the end of the first quarter, to about a combined $17.7bn.

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