UBS may buy back $3.5 bln of auction-rate securities

NEW YORK, July 15 (Reuters) - Swiss bank UBS (UBSN.VX) said on Tuesday it may buy back some or all of its $3.5 billion in auction preferred stock, which was once touted as the next best thing to cash until the irvalue plummeted under the weight of the credit crisis.

UBS said it is developing a structure to offer to repurchase the auction preferred stock, which was issued by registered closed-end tax-exempt funds and held by UBS advisory and brokerage clients in their UBS accounts.

Auction preferred stock is a preferred equity security that pays dividends that are reset by an auction typically held every seven or 28 days. The securities appealed to U.S. state and local government issuers because it allowed them to raise long-term debt cheaper, and it provided leverage to closed-end funds to help boost their returns.

High net worth individuals and corporations liked these securities because they offered slightly higher returns than those on other cash-like assets.

But auctions have been failing since February 2008, leaving many holders unable to sell them. By April the $340 billion U.S. auction rate market was headed to the graveyard, another casualty of the global credit crisis.

Many investors were stuck with auction-rate debt because investment banks stopped buying the unwanted securities in February to avoid piling more bad debt on their balance sheets already weakened by the credit crunch.

In March, an investor sued UBS, accusing it of encouraging clients to place money in auction-rate notes instead of other short-term investments, without disclosing the risks.

The lawsuit sought class-action status.

If UBS is successful in implementing the structure, its clients could receive cash in an amount equal to the liquidation preference of their auction preferred stock plus any accrued and unpaid dividends.

The offer would be available to those UBS clients holding the auction preferred stock on July 15. If the structure receives regulatory approval, it could begin buying back the stock within 30 days after that, UBS said.

UBS said it would finance the offer with the proceeds of remarketed preferred securities to be issued in one or more private placements by a newly-created Trust to be controlled by UBS and consolidated in UBS's financial statements.

The Trust Preferred will pay a dividend rate that will reset based on weekly remarketings performed by a designated remarketing agent, UBS said. (Reporting by Ilaina Jonas; Editing by Kim Coghill)