UBS, the Zurich-based bank hit by subprime woes, is planning the creation of a vehicle to separate problem assets from the remainder of its business as part of a plan to firm up its capital structure.
UBS revealed the idea to inject illiquid US real estate assets into a vehicle on the same day as chairman Marcel Ospel resigned and the bank revealed write-downs from subprime property investments of $19 billion (CHF$12 billion). To help shore up its balance sheet, the bank said it would seek $15.1 billion of new capital via a rights issue.
According to an announcement, UBS has substantially reduced its real estate related positions through valuation downgrades and disposals. But it is the plan to create a new unit to hold various assets that will interest private equity real estate professionals the most.
The bank is planning a spin off or collaboration with a third party investor or a combination of the two, said chief executive Marcel Rohner during a conference call. The creation of the vehicle would enable it to concentrate on the core business, he said.
Earlier today – in a pre-announcement of first quarter losses – UBS said it was creating the “separate unit to manage selected US real estate related positions.
“In the first quarter, UBS substantially reduced its real estate related positions through both valuation adjustments and significant disposals,” the bank said in the pre-announcement. “UBS also announces the formation of a new unit to hold certain currently illiquid US real estate assets. UBS is confident that these measures will deal effectively with the firm's real estate exposures and allow the bank to focus on strengthening its core operations,” it added.
Rohner added in the statement: “We believe this capital increase (of €15.1 billion) and the creation of a vehicle to separate problem assets from the remainder of our businesses will allow us to return to sustainable value creation over time. These measures enable UBS to remain strongly capitalized and focused on client needs, just as our clients expect.”
He continued: “During the quarter, profits from most of the businesses remained acceptable in challenging conditions. We have made further prompt write downs and sales of our impaired US real estate-related positions.”
The new entity is designed to hold substantial parts of the work-out portfolio, which will initially be wholly-owned and financed by UBS but will be reduced in terms of its exposure over time.
“We have reduced risk weighted assets and implemented measures to control costs and strengthen the structure of the firm,” said Rohner. “However, the environment remains difficult, and while we are committed to further substantially reducing our exposures we do not want to undertake sales of positions at severely distressed levels. With these measures we have created the basis to weather one of the most difficult periods in the history of the industry.”
Over the first quarter, UBS's exposure to US residential sub-prime mortgage related positions decreased to approximately $15 billion from $27.6 billion, the statement added.