By Elena Logutenkova
Dec. 10 (Bloomberg) -- UBS AG will write down U.S. subprime mortgage investments by $10 billion, the biggest such loss by a European bank, and replenish capital by selling stakes to investors in Singapore and the Middle East.
Europe's largest bank by assets plans to raise 13 billion francs ($11.5 billion) selling bonds that will convert into shares to Government of Singapore Investment Corporation Pte. and an unidentified Middle Eastern investor, Zurich-based UBS said in a statement today.
UBS scrapped a forecast for a fourth-quarter profit and said it may post a full-year loss. The collapse of the U.S. subprime mortgage market has led to about $76 billion of losses and markdowns at securities firms and banks this year. UBS rose as much as 2.6 percent in Zurich trading after the bank followed Citigroup Inc., the largest U.S. bank, in taking on strategic investors to bolster capital.
``UBS was quite clever this time to couple some extremely bad news with some good news,'' said Dieter Winet, who helps manage about $50 billion including UBS shares at Swisscanto Asset Management. ``It's positive that capital is placed in firm hands. This will help restore trust in private banking and asset management and help UBS write new business.''
UBS shares were up 1.5 francs to 58.7 francs by 11:31 a.m., after initially dropping as much as 3.4 percent. The shares have fallen 19 percent over the past 12 months, erasing about 25 billion francs of the bank's market value.
Singapore's GIC, which oversees the island nation's foreign reserves of more than $100 billion, will invest 11 billion francs in UBS for a 9 percent stake. The Middle East investor will put in 2 billion francs.
New York-based Citigroup announced last month a $7.5 billion cash infusion from Abu Dhabi after record mortgage losses wiped out almost half its market value. Ping An Insurance (Group) Co., China's second-largest insurer, bought a 4.18 percent stake in Fortis for 1.81 billion euros ($2.7 billion).
``Because there's a lot of liquidity in those countries and those sovereign wealth funds, they'll be looking for investment opportunities,'' said Masafumi Oshiden, a Tokyo-based fund manager at BlackRock Japan Co., whose parent company holds $1.1 trillion in assets. ``The valuations have come down a lot.''
UBS also plans to sell 36.4 million treasury shares that it previously intended to cancel, raising about 2 billion francs, and proposed replacing the 2007 cash dividend with stock, boosting capital by 4.4 billion francs. The convertible bond sale and dividend change must be approved by an extraordinary shareholders meeting in mid-February, the bank said.
UBS plans to raise a total of 19.4 billion francs through all the measures, which will improve its so-called Tier 1 capital ratio to more than 12 percent from 10.6 percent on Sept. 30.
The bank posted its first loss in almost five years in the third quarter after the subprime contagion led to $4.66 billion in markdowns on fixed-income securities and leveraged loans.
``The industry has been moving to more aggressive markdown rates'' on subprime-related assets, said Kinner Lakhani, a London-based analyst at ABN Amro Holding NV with a ``hold'' rating on UBS shares. UBS's previous writedowns had been ``well below industry benchmarks.''
Bottom in November?
The bank's losses already cost the jobs of Chief Executive Officer Peter Wuffli, his finance chief Clive Standish and investment-banking head Huw Jenkins. Chairman Marcel Ospel told journalists on a conference call that there is ``no pressure internally'' for him to resign, though he doesn't ``expect or want'' a bonus for 2007.
The strategic investors expressed confidence in UBS's business model of combining wealth and asset management with investment banking, Ospel said. The bank doesn't rule out giving board seats to the investors, and already received indications of interest in its treasury shares.
Marcel Rohner, who was named CEO in July, CFO Marco Suter and Chief Risk Officer Joseph Scoby are scheduled to give analysts and investors a business update in London tomorrow.
Speculation about subprime writedowns in the past quarters has been ``distracting,'' Rohner said. Credit markets may have reached a bottom in November, when values fell to ``extremely bad'' levels, he told journalists.
`Draw a Line'
The bank was expected to write down about 2.6 billion francs in the fourth quarter, according to the average estimate of five analysts who published forecasts over the past month.
``This appears to be an attempt to draw a line under UBS's subprime woes and circumvent any contagion of sentiment to its wealth management businesses,'' Keefe, Bruyette & Woods Ltd. analysts Matthew Clark and Vasco Moreno said in a note to clients.
Investors added a net 30 billion francs at UBS's global wealth management and business banking division in October and November, the bank said.
UBS will further reposition its investment-banking unit by cutting assets, risk-taking and making it work more closely with the asset and wealth management divisions, Rohner said.
``An investment bank can and will incur losses,'' Rohner said. ``But it should never drag the whole group into loss-making territory. Wealth management clients don't like this uncertainty.''
Credit-default swaps tied to the Zurich-based bank's debt rose 1 basis point to 57 basis points, according to Deutsche Bank AG. The cost of credit-default swaps, used to speculate on the ability of companies to pay their debts, rise as perceptions of credit quality worsen.
Tony Tan, deputy chairman and executive director of Singapore's GIC, said that while it's impossible to say with ``absolute certainty'' there will be no further writedowns, ``we are very satisfied that UBS has taken a very conservative view with regards to their holdings.'' The investment in the Swiss bank is the 26-year-old GIC's largest single purchase, he said.
After the markdown announced today, the bank held about $16 billion in residential mortgage-backed securities as on Nov. 30, ``basically zero'' in collateralized debt obligations and about $13 billion in so-called super senior securities, or AAA-rated structured debt that gets paid back ahead of other similarly rated bonds in case of a default.
Investments in mezzanine CDOs, part of the super-senior holdings, were cut to $7.8 billion from $14.2 billion, reducing the value of these bonds to 45 cents on the dollar, UBS.