UBS CDS widen, credit ratings eyed on writedown

LONDON (Reuters) - The cost of insuring debt of Swiss bank UBS in the credit derivatives market rose on Monday and analysts said its credit ratings could come under pressure after it said it would make its first quarterly loss in nine years.

UBS said on Monday it would write down 4 billion Swiss francs ($3.42 billion) in losses in its fixed-income portfolio and elsewhere due to the turmoil in credit markets, resulting in a third-quarter loss of 600-800 million Swiss francs. It said it would cut 1,500 jobs in its investment bank.

Five-year senior credit default swaps on UBS widened 3 basis points to 28 basis points, while subordinated CDS widened 3 basis points to 39 basis points, according to prices from Deutsche Bank. The prices mean it costs respectively 28,000 and 39,000 euros a year to insure 10 million euros of UBS debt against default.

"This poor performance does not come as a surprise after the bearish outlook statement that was given in August... We stick to an underweight," analysts at Dresdner Kleinwort said in a note to clients. "Negative rating actions may follow from S&P and Fitch given the substantial size of the hit."

Both Standard & Poor's and Fitch Ratings moved their rating outlooks on UBS to negative in the middle of September, warning of the risk to third-quarter earnings.

"Ratings cuts are a real possibility," analysts at Royal Bank of Scotland wrote. "UBS will of course suffer this morning, but expect also those banks with large (investment-banking) divisions which have not yet reported -- Deutsche Bank, Merrill Lynch and JP Morgan among them -- to be weaker for choice pending further announcements."

S&P said on September 18 that it could cut UBS's AA+ rating if weak investment-banking returns diminished the earnings prospects for the overall group.

"UBS may be challenged in maintaining a performance level that is consistent with the current long-term rating," S&P credit analyst Richard Barnes said then.

Fitch said on September 17 that weak investment bank earnings would normally be offset by other more predictable cash flows from wealth and asset management, but that this ability could become stretched and test the agency's tolerance for earnings volatility at the AA+ level.

Moody's Investors Service rates UBS at the highest level of AAA with a stable outlook.