Global Business

UBS Banks on the Swiss Government

The banking giant unloads $60 billion in illiquid securities in an arrangement with the Swiss central bank.
Stephen TaubOctober 16, 2008

UBS said that it has unloaded $60 billion in illiquid securities and other assets to a separate entity under an arrangement with the Swiss central bank.

Through the transaction, which removes the shaky assets from UBS’s balance sheet, UBS caps future potential losses from these assets, secures their long-term funding, reduces its risk-weighted assets, and materially de-risks and reduces its balance sheet, according to Swiss banking giant.

“The solution significantly reduces the uncertainty for UBS shareholders and clients and contributes to the stability of the financial system by ensuring an orderly sale of these assets,” it said in a press release.

Analysts also noted that the move represents a signal that the Swiss government is taking strong action to protect banking, an industry that represents a significant part of its economy. The government gets a 9 percent nonvoting UBS stake in the transaction.

The fund will be capitalized with up to $6 billion of equity capital provided by UBS and a nonrecourse loan of as much as $54 billion provided by the Swiss National Bank. The entity will be controlled by the SNB. The loan will be priced at Libor plus 250 basis points. It will mature in eight years, although the maturity may be extended to 10 or 12 years.

UBS will sell its equity interests to SNB for $1, and will have an option to repurchase the equity once the loan is fully repaid for a purchase price of $1 billion plus half of the equity value exceeding $1 billion.

“In these turbulent times we want to ensure that we do everything possible to safeguard the solidity of our bank,” said UBS Chairman Peter Kurer. “We are taking practical steps to eliminate legacy risks.”