UBS's Shell Game

The Financial Times' “UBS surprises with size of rights issue” and “UBS set to finance $15bn securities carrier” report the dramatic moves by UBS (UBS) to clear the decks of undesirable assets and strengthen its balance sheet. The $15.6B offering gives current shareholders the right to buy 7 new shares for every 20 held at a SFr21 vs. Wednesday’s close of SF30.64. The 760M new shares start trading June 13, and were fully underwritten by JPMorgan (JPM), Morgan Stanley (MS), BNP Paribas and Goldman Sachs (GS). This ensures UBS will receive the funds.

Next is a new twist on the SIVs that haunted Citigroup (C) and others not long ago. UBS sold $22B face value of U.S. subprime and Alt-A mortgages, with a spattering of prime securities, to a BlackRock (BLK) special investment vehicle. The price was a steeply discounted $15B. BlackRock investors put up $3.75B in equity and UBS loaned the remaining $11.25B. UBS might also receive a performance fee. In my judgment this is a shell game. UBS is still at risk for the loan and the loan would be valued based on the underlying collateral.

At the end of the first quarter, UBS held $15.6B in subprime and 17.1B in Alt-A mortgages. After the BlackRock transaction, the combined total drops to $17.7B.

Some might consider this transaction beneficial because it brings more pricing visibility to distressed assets. But I think greater clarity into the bank would have been gained through an outright sale, with no strings attached.

Disclosure: Author is long C and UBS.

Comments

[venividivici]

Why anyone would be investing in these two unmitigated loser stocks totally defeats me.Why don't you look for a stock run by people who actulally know what they are doing other than paying failed CEOs massive golden parachutes ?

[lsuavecito]

None of this addresses the fact that UBS is being sued, by their own clients, for hundreds of millions. This is a result of UBS's sticking their clients with what appear to be worthless AUCTION RATE SECURITIES. These were represented/sold as AAA, money market, cash, short term notes. As auctions failed because UBS didn't step in, UBS clients were stuck with doo doo. UBS's answer to loyal clients is wait, or out of much generosity UBS will lend clients their own $$ at some prevailing rate; Highway Robbery!