UBS shocks investors with risky debt exposures

By Andrew Hurst and Thomas Atkins

ZURICH (Reuters) - Swiss bank UBS shocked markets with tens of billions of dollars in new exposure to risky U.S. mortgages, leveraged finance and complex securities, dramatically raising its vulnerability to the credit crisis.

The revelations, which included $26.6 billion in exposure to U.S. mortgages distinct from subprime loans, sent the bank's shares tumbling to levels not seen since 2004 as investors braced for even more writedowns.

UBS stock has lost more than half its value since last June after it took $18.1 billion of writedowns in the second half of 2007 alone on subprime-related exposures.

"They have $60-70 billion worth of exposure to troubled areas and the market did not know about much of it," said David Williams at Fox-Pitt, Kelton in London.

Deutsche Bank estimated that UBS's total exposure to risky U.S. mortgages was $68.7 billion.

"They are in a sorry predicament. They have by far the largest exposure of any European bank and they cannot just trade out of it. The crisis at UBS will last as long as the credit crisis lasts," said Williams.

Shares in UBS, which said it was facing another difficult year in 2008, were trading down 7 percent at 38 francs at 1500 GMT.

UBS also unveiled further exposures of $11.4 billion in leveraged finance -- loans made to fund buyouts of companies -- and of $11.2 billion to a complex securitization product called a U.S. reference-linked note program.

"There is no end in sight. They are giving a pretty clear steer that there are more writeoffs to come," said Simon Maughan at MF Global Securities, saying another 10 billion francs in charges were quite feasible.

UBS said on Thursday the biggest chunk of the newly unveiled exposure, announced together with full-year and fourth-quarter results, was to so-called Alt-A mortgages, which are of higher quality than subprime loans but also considered risky.

UBS's existing exposure to U.S. subprime mortgages at the end of December stood at a net $27.594 billion, making it one of the biggest casualties of the global credit crunch worldwide.

Chief Executive Marcel Rohner said he could not say if UBS would return to profit in the first quarter, after posting a fourth-quarter loss roughly in line with guidance given at the time of the bank's profit warning last month.

UBS reported a net fourth-quarter loss of 12.451 billion Swiss francs ($11.3 billion) and said it lost 4.384 billion francs for the year, in line with analysts' forecasts the profits warning.

UBS Chief Financial Officer Marco Suter also said Singapore and an unnamed Middle East investor, who both agreed in December to provide a 13 billion Swiss franc capital injection, were still committed to subscribing to a mandatory convertible note.

Rumors that Singapore was having second thoughts about the convertible issue have swirled in recent days and analysts say UBS may have to resort to a rights issue to bolster its balance sheet if more losses pile up.