Reuters: Bankruptcy News: UBS deal vindicates permanent write-down

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UBS deal vindicates permanent write-down Aug 13th 2012, 17:12 Mon Aug 13, 2012 1:12pm EDT * UBS wins over institutional buyers on US-targeted deal * CFO says permanent write-down route now open to others * Euros, Swiss deals possible, but costlier By Helene Durand and Katharina Bart LONDON, Aug 13 (IFR) - The second low-trigger contingent capital that UBS priced on Friday appeared to vindicate its choice of a permanent capital write-down structure, and could open the door for others to follow. UBS has said it would meet its regulatory requirements through equity and low-trigger contingent capital instruments in which investors face potential permanent losses, if the Swiss bank's common equity Tier 1 falls below 5%. Compatriot Credit Suisse has for its part focused thus far on high-trigger contingent capital that converts into equity if the bank's capital ratio falls below 7%. Investors and dealers had doubted that UBS would be able to sell a large amount of this type of security because of limited appetite. "This deal absolutely proves that there is demand for a structure with full write-down, and that investors are prepared to buy into these deals when the trigger is low and the institution well-capitalised," said Tom Naratil, chief financial officer at UBS. UBS has to raise CHF14.4bn of low-trigger contingent capital by January 1 2019, based on second-quarter risk-weighted assets. In February, UBS sold a USD2bn 10-year non-call five Tier 2 carrying the same write-down features; it attracted USD5.5bn of demand, but mainly from retail investors. Naratil added that the new deal would open the market for other issuers. "However, the most likely to be able to issue this type of structure first are banks with strong capital ratios," he said. BACKBONE UBS's efforts form the backbone of a capital-building program in preparation for a Swiss top-up of far stiffer rules from international banking regulators, which coincides with a renewed focus on its flagship private banking arm, the world's second-largest after Bank of America as measured by assets. In addition to raising capital through write-down debt, UBS is also seeking to prune risky assets overall and at its investment bank. The investment bank's risk-weighted assets, or RWAs, which stood at 170 billion francs in the quarter, will be cut to less than 135 billion francs in 2016, UBS said two weeks ago. Friday's USD2bn Tier 2 low-trigger 10-year bullet attracted USD9bn of demand from more than 450 investors, with 70% going to institutional buyers and the reminder to retail -- the mirror image of the February trade. "Being the first Basel III-compliant full writedown contingent capital to be offered globally made a substantial difference in terms of the final demand," said UBS's Naratil. "To add the US as a viable destination was very helpful, with 58% of the notes sold there." INSTITUTIONAL BUYERS Observers said it was encouraging to see the structure work with institutional investors as until now, issuers have mainly had to rely on the Asian retail market to get deals away. "While not a game-changer, it is a very positive evolution for this market, which is still developing," said a bond syndicate banker. "To have the US on board gives more flexibility to issuers." One head of bond syndicate added that the timing allowed UBS to get the deal away. "The market had been starved of supply, and UBS picked its timing right." It was the first time that US investors have had to grapple with a structure in which they could face such an explicit loss. At a 17.2% total capital ratio on a Basel 2.5 basis, UBS would have to eat through CHF26bn of capital for the 5% trigger to be hit. It would be a similar amount on a Basel III basis. In its second-quarter results, the bank said its Common Equity Tier 1 ratio on a fully applied Basel III was 8.8%, up from 7.5% at the end of March. Not only was there discussion around how much UBS would have to lose to hit the 5% trigger, investors also needed time to get their heads around the concept of non-viability, Naratil said. "Ultimately, investors have to be comfortable with how management will run the institution," he said. Naratil added that UBS would look at diversifying into other currencies such as Swiss francs and euros. Bankers believe that the cost in these different currencies could be higher for the bank, however. UBS priced last week's transaction with a 7.625% coupon, while the February trade came with a 7.25% coupon. "They have done the deals in the right order," said the syndicate banker. "And while I think they can do something in that structure in the euro market, it won't be at that price." (Reporting by Helene Durand; Editing by Alex Chambers) Link this Share this Digg this Email Reprints

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