Swiss Government To Save UBS, Will Get 9% Non-Voting Stake

UBS and its predecessor organizations have a long and global reputation for safeguarding the assets of the world’s wealthy people and entities. Now that the bank is buckling under the weight of its $48 billion in write downs so far this year, the Swiss government clearly recognizes how importance of keeping UBS alive and will invest $5.3 billion for a 9% stake, although the stake is not very influential, and does not call for a moratorium on dividends.

The fundamental question of government-led bank rescues has been: what control do they get? This deal doesn’t set a good tone if the crisis worsens and governments need to take a more active role. But all of this strategy is being created as we go. Below is WSJ’s summary of the deal’s terms:

…The plan will see the Swiss central bank take as much as $60 billion of toxic assets off UBS’s balance sheet. The Swiss government will invest $5.3 billion in UBS in return for a 9% stake, while rival Credit Suisse Group will raise roughly $9 billion privately. The Swiss government has also left open the option of guaranteeing new debt issued by the banks.

…Switzerland’s bailout also highlights the divergent fortunes of UBS and its hometown rival, Credit Suisse, which has survived the financial crisis relatively unscathed. The Swiss government offered Credit Suisse a capital injection on terms similar to those of UBS, but the bank opted to raise money from private investors instead. Credit Suisse said Thursday it had already lined up the necessary investment from a group led by the Qatar Investment Authority.

…The $9 billion Credit Suisse is raising will bring its so-called Tier-1 capital ratio — a measure of equity in relation to assets and a key indicator of banks’ health — to 13.7% from 10.4%. That compared with an average Tier-1 ratio among European banks of 8.1%. UBS’s Tier-1 ratio will rise to 11.5% and the bank will likely have to raise that “substantially more,” Citigroup analyst Jeremy Sigee wrote in a research note. That could require it to sell off more assets, or raise more funds from the government or private investors.

…The government’s investment in UBS will take the form of a bond that pays a hefty 12.5% coupon and is convertible into a roughly 9% nonvoting stake in the bank … Under the plan, UBS will transfer securities backed by mostly U.S. and European residential and commercial mortgages into a special fund, which will borrow as much as $54 billion from the Swiss National Bank to finance the holdings. The other $6 billion will come from an equity injection by UBS. The fund will attempt to sell the assets over the next eight to 12 years, with the government getting the first $1 billion of any profits and splitting the rest with UBS. If the assets are sold at a loss, the government could receive an added stake in the bank.