UBS shocks investors with risky debt exposures

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.

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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.

“This is a committed transaction,” Suter told Reuters.

Suter downplayed talk that the Swiss bank would seek to raise capital yet again, saying it could improve regulatory capital ratios without having to raise equity, by cutting risk-weighted assets or by issuing hybrid debt instruments.

People walk past the Swiss bank UBS office at St-Francois Place in Lausanne February 14, 2008. Swiss bank UBS unveiled CHF 4,384 billion ($3,953 billion) loss for 2007, local media reported. REUTERS/Denis Balibouse

Shareholders will be asked to approve the capital increase at an extraordinary shareholders’ meeting on February 27.


The bank gave a detailed breakdown of $13.4 billion of writedowns made in the fourth quarter. This was slightly less than UBS’s previous tally of fourth-quarter writedowns of $14.4 billion.

UBS wrote down $4 billion of its subprime exposure in the third quarter.

The bank took a $2 billion charge on its exposure to the Alt-A mortgages. It also took a charge of $871 million on credit protection bought from monoline bond insurers.

CFO Suter said it had net exposure of $3.6 billion to monoline bond insurers -- which insure interest and capital payments on bonds and sell protection on collateralized debt vehicles -- businesses that have looked increasingly fragile as the credit crisis spreads.

In addition, it took a $9.6 billion charge on subprime mortgages and a $1.2 billion writedown on subprime and Alt-A components of a securities program called a U.S. reference linked note.

More than half of the Alt-A writedown was taken against a higher risk category of the debt worth $5.4 billion at the end of December.

The bank reported its key wealth management business appeared to hold up in the fourth quarter, with net new money inflows of 31.7 billion francs, above analysts’ average forecasts of 30 billion francs.

Some investors were unnerved that money inflows appeared to lose momentum towards the end of the year after UBS said in December that net new money in October and November alone had topped an estimated 30 billion francs.

Rohner told an analysts’ presentation that net new money inflows into its wealth management business was positive in January.

The world’s largest wealth manager had suffered fourth-quarter outflows of 16.2 billion francs from its global asset management business as institutional clients pulled money out of equities, fixed-income and multi-asset products.

Some analysts had predicted that UBS’s $18.4 billion of subprime writedowns would frighten away wealthy clients.

Rohner said the bank continued to reduce exposure in January, but declined to make a forecast for first-quarter results, saying market conditions were particularly challenging.

Additional reporting by Thomas Atkins and Douwe Miedema, editing by Will Waterman and Erica Billingham