Blackrock-UBS deal a sign buyers returning to subprime

LONDON/ZURICH (Reuters) - BlackRock's (BLK.N) purchase of a massive subprime portfolio from UBS (UBSN.VX) is a sign that first buyers are returning to assets long considered too toxic to touch, and more similar deals may follow.

Under the deal, expected to be finalized this month, the U.S. asset manager will take a portfolio with a notional value of $22 billion off the Swiss bank's books for $15 billion, making it the biggest of its kind so far.

"It's quite a significant deal, because what we're beginning to see is that private capital is coming in and is willing to buy," said David Williams, analyst at Fox-Pitt Kelton.

"It suggests the market is freeing up a bit. It suggests the smart money can commit money to this, when six months ago it would not look at it," he said.

However, the opacity of the deal, announced last week, makes it hard to be sure exactly how brave a purchase it is.

Few details of the portfolio have been revealed, other than that it consists of subprime and Alt-A -- which range from near-prime to near-subprime -- bonds, rather than structured products, priced at an average 68 cents to the dollar.

"I'd imagine it is probably not very low in the capital structure. It is not a huge discount to face value given some of the very toxic writedowns that have already taken place," said John Jay, senior analyst at Aite Group. "The number and then the discount didn't strike me as BBB."

UBS has said it would sell the portfolio, which has a value of $15 billion on its books, without a "loss or a gain", implying a 32 percent discount to the notional value.

BlackRock has declined to comment on the deal.

But an industry source told Reuters that Blackrock would put the assets into a fund open to other investors. UBS was likely to hold some of the debt in the fund as well, the source said, though how much was still up for negotiation.

The deal might close this month, the source said.

INVESTORS RETURN

UBS said last week the sale was a signal the market for ailing U.S. real estate loans is recovering, as "sophisticated investors" come into the market.

"This is a very efficient way of punting a large block right out of the door (for UBS). The alternative is to try and sell to buyers one at a time. That could be very painful and could take months," said Aite Group's Jay.

But the deal was also a smart one for Blackrock -- once a bonds shop but now widely diversified into equities and alternative investments -- he said, because it enabled the group to sell a new product to clients.

The deal with UBS follows on from smaller deals by banks hit by the subprime meltdown. Last month Deutsche Bank (DBKGn.DE) sold $5 billion of leveraged buyout deals to a group of U.S. private equity firms.

And in March, Blackrock was asked to manage -- though not own -- $30 billion on behalf of the Federal Reserve Bank of New York tied to the Fed's rescue of investment bank Bear Stearns BSC.N by JPMorgan Chase (JPM.N).

Further deals now look likely as banks look to rebuild their reputations, and demand and pricing begin to be established for subprime assets after the steep falls since last summer.

"I would indeed expect more," said Fox-Pitt Kelton's Williams. "Banks want to demonstrate to the world that they're not as risky as they were."

"It's notable that they (UBS) are actively looking to sell down risk rather than hang on until maturity," said Keefe, Bruyette & Woods analyst Matthew Clark.

"They're still very much in risk reduction mode, therefore we can expect more of these deals."

While UBS will help finance the new fund, most likely via debt, BlackRock now faces the tricky task of attracting third party equity and debt investors for the fund. That requires guts -- but it's not impossible.

"The people who are clients of Blackrock can pretty much afford it. They're institutional and ... they are not treating this as a singular strategy," said Jay.

(Editing by Sue Thomas)