Swiss National Bank to Assist UBS With Subprime Exposure

UBS announced an agreement with the Swiss National Bank (SNB) today to transfer up to $60 billion of currently illiquid securities and other assets from its balance sheet to a separate fund entity.

These assets include $31 billion of primarily cash securities made up of US subprime, US Alt-A, US prime, US commercial mortgage-backed securities and residential mortgage-backed securities, US student loan auction rate certificates and other securities backed by student loans, and US reference-linked note programs.

Here is how the deal will work: UBS will transfer up to $60 billion of assets to a newly-created fund entity and will capitalize the fund with equity of up to $6 billion.

In order to fund its equity contribution, and maintain a strong capital position, UBS can raise CHF 6 billion of new capital in the form of mandatory convertible notes (MCN). The MCN have been fully placed with the Swiss Confederation.

The SNB will finance the fund with a loan of up to $54 billion, secured by the assets of the fund. The SNB will also take over control and ownership of the entity by purchasing the equity for $1. The loan will be non-recourse to UBS, based on no change of control of UBS and will be priced at Libor plus 250 basis points. It will mature in eight years, but the maturity may be extended to 10 or 12 years.

At completion of the transaction, UBS' net exposure in these risk categories will be reduced to nearly zero, according to the bank. The bank will hold residual long positions in these asset classes hedged through existing short positions.