UBS to buy back bonds to boost capital ratio

By Martin de Sa'Pinto

ZURICH (Reuters) - UBS (UBSN.VX) (UBS.N) said it will buy back up to 1 billion euros ($1.30 billion) of bonds to boost its balance sheet while asking shareholders to let it raise equity capital if needed.

The Swiss bank said in a statement the bond buyback offer referred to four subordinate issues with maturity dates between November 2015 and September 2019 and a notional value of around 7 billion Swiss francs ($5.96 billion).

"The dislocations on the credit markets have pushed down these instruments to ridiculous levels and they now trade at discounts of 70 percent and more to nominal values," said Kepler Capital Markets analyst Dirk Becker.

"There is a good chance that UBS can buy back these instruments for heavy discounts in the tender and this would be booked as a profit... Therefore this offer will ultimately lead to a higher core capital for UBS."

UBS said all four bonds are trading at a significant discount to issue price and said the repurchases would result in "a small beneficial effect" on its Tier 1 regulatory capital ratio, but did not say by how much.

UBS had a Tier 1 ratio -- a key measure of capital strength -- of 11.5 percent at the end of 2008.

UBS, the world's biggest wealth manager, was one of the banks hit hardest by the subprime debacle, with writedowns totaling $49 billion at the end of 2008.

UBS shares were up 6.5 percent at 12.58 Swiss francs at 1037 GMT, outperforming a 5.2 percent firmer DJ Stoxx European banking index .SX7P. UBS bonds also reacted positively, with yields on shorter-dated bonds dropping by as much as 36 basis points by 1000 GMT.

CONTINGENCY MEASURE

In a separate statement setting out the agenda for its annual general meeting on April 15, UBS said it will ask shareholders to approve authorized capital as a contingency measure to increase its flexibility to raise future capital.

"As events in 2008 have shown, certain peers of UBS were able to raise capital faster and with greater flexibility in their choice of instruments than UBS due to the availability of existing authorized capital," it said.

UBS said the move would allow the bank if necessary to increase share capital up to a maximum of 10 percent of the currently issued share capital, or 293 million shares, by no later than April 15, 2011.

"The increase in authorized capital looks like a prudent cautionary measure given that its tier 1 ratio is 11.5 percent, but speculation is bound to arise that UBS is preparing for yet another rights issue," said Helvea analyst Peter Thorne.

Kepler's Becker said that at current share price levels, the move would allow UBS to raise around 3 billion francs, adding that new Chief Executive Oswald Gruebel could look to clean up remaining toxic assets in its portfolio, which could allow a capital increase to come relatively soon.

However, analysts at J.P. Morgan Securities (JPM.N) said in a report released on Wednesday that according to their capital and risk analysis, UBS would not need to raise equity capital.