KEY POINTS:
Swiss bank UBS unveiled US$10 billion ($12.76 billion) in shock sub-prime writedowns yesterday and said it had obtained an emergency capital injection from the Singapore Government and an unnamed Middle East investor.
UBS, which has been severely battered by the US sub-prime mortgage meltdown, issued a profit warning and cancelled plans for a cash dividend in moves that depressed the company's shares and those of its rivals.
The US$10 billion charge was one of the largest writedowns by any global bank since the sub-prime crisis broke and was the latest sign of the devastation wrought upon some of the world's largest financial institutions from the credit crisis.
The announcement sent UBS's shares tumbling as investors took fright from the anticipated dilution of their share of earnings. The shares initially fell 2.97 per cent but later trimmed losses to trade 1.22 per cent lower.
"The level of dilution is very significant," said Omar Fall, an analyst at ABN Amro in London.
The Singapore investment, which gives the Asian island-state a 9 per cent stake in UBS, was the latest case of a rescue of a top western bank by a sovereign wealth fund, after the Abu Dhabi Investment Authority bought a US$7.5 billion stake in Citigroup.
"It's a developing trend. Asian and Middle Eastern sovereign investors are cash rich and have a longer time horizon than the average market investor," said Fall.
UBS said the Swiss bank has not ruled out granting board seats to the new investors.
UBS said it had made a 13 billion Swiss franc ($14.7 billion) issue of fresh capital, 11 billion francs of which were to be placed with the Government of Singapore Investment Corporation (GIC) and 2 billion francs with a Middle East investor.
A financial source said the Middle East investor was believed to be the government of Oman.
The announcement comes on the eve of an investor day in London at which UBS chief executive Marcel Rohner is due to address analysts and investors.
The bank also said it would approve the resale of 36.4 million treasury shares previously intended for cancellation, increasing Tier 1 capital by about 2 billion francs.
UBS is to replace the 2007 cash dividend with a bonus stock issue which would boost Tier 1 capital by 4.4 billion francs. Together with the capital increase, Tier 1 capital would be raised by a total of 19.4 billion francs, boosting its Tier 1 capital ratio to 12 per cent.
Keeping a high Tier 1 capital ratio is key to securing UBS's franchise as the world's largest wealth manager and retaining the business of its very richest clients, which include many billionaires, say analysts.
The latest writedowns mainly involved "super senior debt" and collateralised debt obligations (CDOs), said UBS.
The two new investors will subscribe to an issue of mandatory convertible notes carrying a coupon of 9 per cent until conversion into ordinary shares, which must take place within approximately two years of the issue.
A financial source said the coupon was exceptionally high. "It shows what a pitiful state they are in," said the source, who asked not to be identified.
UBS chairman Marcel Ospel said the coupon on the convertible notes reflected normal market conditions.
The announcement comes towards the end of a dramatic year for UBS, which announced a third-quarter loss - its first quarterly loss in five years - after making 4.4 billion francs of writedowns on sub-prime-related exposures.
CEO Peter Wuffli left the bank in July and was replaced by Rohner. The bank has since replaced nearly all of its top managers.
