ZURICH UBS UBSN.VX announced a $10 billion write-down and a massive injection of funds from Singapore and the Middle East, making it the biggest subprime crisis casualty to date among major European banks.
Singapore is taking 9 percent of UBS in a deal that mirrors action taken by U.S.-based Citigroup (C.N) two weeks ago. Citi expects to write off between $8 billion and $11 billion and secured funding from the Abu Dhabi Investment Authority.
Europe's fourth-biggest bank also raised the possibility it will make its first full-year loss in a decade.
"In our judgment these write-downs will create maximum clarity on this issue and will have the effect of substantially eliminating speculation," said UBS Chief Executive Marcel Rohner.
The write-down follows a 4.2 billion Swiss franc ($3.7 billion) hit that UBS suffered at the end of October which was also related to U.S. subprime mortgages -- loans made to high-risk home buyers who face rising interest rates and are now defaulting on payments.
The Swiss bank's chairman, Marcel Ospel, said further big write-downs were unlikely but indicated that noting could be entirely ruled out.
"It was very hard for me to imagine that such a scenario as we are seeing today could happen. I do not have a crystal ball in order to tell what can happen tomorrow or the day after tomorrow," he told Germany's Frankfurter Allgemeine Zeitung.
UBS said it expects a fourth-quarter loss and warned that it may even make a loss for 2007 as a whole. This would be the bank's first full-year operating loss since 1996, when UBS and Swiss Banking Corporation, with which it merged two years later, were both hit by losses in the Swiss mortgage market.
The bank also said it would replace a proposed cash dividend with a stock-based payout for 2007 instead of a cash payment, and said it would scrutinize its investment bank business thoroughly and weed out low-profit divisions.
UBS's shares initially fell almost 3 percent as investors took fright at the anticipated dilution of their share of earnings. They later recovered on relief that the worst of UBS's subprime woes could be over, and closed 1.4 percent higher at 58 Swiss francs.
Credit rating agency Fitch Ratings cut its ratings of UBS by one notch to AA and said only the bank's swift action to raise capital had prevented a more savage downgrade.
SINGAPORE'S 9 PERCENT
The Southeast Asian island-state of Singapore will hold its 9 percent stake through the Government of Singapore Investment Corporation (GIC), a second major injection of sovereign wealth fund cash into a major bank along the lines of the Abu Dhabi Investment Authority's purchase of its $7.5 billion stake in Citigroup on November 27.
"It's a developing trend. Asian and Middle Eastern sovereign investors are cash rich and have a longer time horizon than the average market investor," said Omar Fall, analyst at ABN AMRO.
A further stake of about 1.5 percent is going to an unnamed Middle East investor, and the two investments will raise 13 billion Swiss francs ($11.5 billion) of fresh capital. Oman's State General Reserve Fund denied suggestions that it was the investor in question.
UBS said it had not ruled out granting board seats to the new investors.
Rohner and other top managers are due to address analysts and investors in London on Tuesday.
UBS Chairman Ospel, who said he was under no pressure from within the bank to resign, said UBS now faces a challenge refocusing its investment bank, which has taken the full force of the subprime meltdown.
The bank also said it would approve the resale of 36.4 million treasury shares previously intended for cancellation, increasing Tier 1 capital by about 2 billion francs.
UBS is to replace the 2007 cash dividend with a bonus stock issue which would boost Tier 1 capital by 4.4 billion francs.
Together with the capital increase, Tier 1 capital would be raised by a total of 19.4 billion francs, boosting its Tier 1 capital ratio to 12 percent.
Keeping a high Tier 1 capital ratio is key to securing UBS's franchise as the world's largest wealth manager and retaining the business of its very richest clients, which include many dollar billionaires, say analysts.
The latest write-downs mainly involved UBS's holdings of risky "super senior debt" and of collateralized debt obligations (CDOs), said UBS. The write-downs were based on the values of the exposures at the end of November.
Only last month UBS's Chief Financial Officer Marco Suter advised analysts and investors in meetings that the bank did not expect to make any huge write-downs in the fourth quarter.
The two new investors will subscribe to an issue of mandatory convertible notes carrying a coupon of 9 percent until conversion into ordinary shares, which must take place within approximately two years of the issue.
(Additional reporting by Kevin Lim and Sebastian Tong in Singapore, Douwe Miedema and Thomas Atkins in Zurich; editing by Brian Moss and Elizabeth Fullerton)