The Quote of the Month
“Please, God, just one more bubble!” quoted from Warren Buffet’s 2007 Letter to the Shareholders of Berkshire Hathaway
The Position of the Month
Stock: UBS
Position: Short
Basic Position Opening Price
Above $30
Basic Position Expected closing price
Below $15
Advanced Investor Position Opening Price
Buy UBS $35 Jan 09 puts at $8.50 / contract or lower
Advanced Investor Position Closing Price
Sell to Close at $19 / contract
The Summary
UBS is overleveraged and delaying an inevitable unwind. In the meantime, it is destroying centuries old customer confidence in Swiss banking.
Currently UBS is in a state of crisis. As Jim Cramer once said "Whenever you smell smoke, behind the door there is probably a giant conflagration!" The smoke is currently seeping out of UBS in the form of desperate measures to raise liquidity.
* UBS recently dumped $25B Alt-A mortgages due to liquidity concerns
“Analysts said they believed UBS had sold its Alt-A investments -- U.S. mortgages ranked between prime and subprime – to bond manager Pimco for 70 cents to the dollar, taking a deep discount on a 26.6 billion Swiss franc ($25.7 billion) portfolio.” Chris: A sure sign of cash concerns is bulk sales of loans.
* UBS still holds $400B in repurchase agreements for funding
“Analysts also said they expected the ailing bank making further writedowns on a massive 400 billion franc portfolio of repurchase agreements as it rushes to cut its exposure to the capital markets in general and to risky assets in particular.” Chris: This just shows how many assets they are holding out to avoid liquidating in an unforgiving market.
UBS tried to sell it’s Paine Webber brokerage arm to raise cash
“Swiss bank UBS, another bank suffering from the credit crunch, recently shopped its PaineWebber brokerage unit in an effort to drum up cash but failed to find the right buyer. (BAC, Wells Fargo and Barclays all declined).”
UBS needs to raise cash in a unforgiving market. There are tons competing assets sales, but all the potential customers are overleveraged and marketing the same securities themselves or prudent and choosier by the day. UBS needs to find solutions fast, while the clock on $400B in debt deteriorating in value is ticking away.
The Story
In the movie Die Hard, the evil villain says that after stealing $20m in bonds and lock safe baubles, he planned to store them in a “Swiss bank account and sit on the beach collecting 6%”. He might want to rethink that strategy.
For much of the 20th century Switzerland was considered the world’s safe haven for banking. African dictators, European despots, and Nazi war criminals all found it an oasis for savings in tumultuous times. In the latter part of the century, Swiss banking consolidated to two names, Union Bank of Switzerland and Credit Suisse.
At some point all this revere and sticky old money was not enough. The old money wanted higher returns and hedge funds came en vogue. UBS, providing the connections to the massive money of the old world, became a key prime broker to the hedge funds. Prime brokers are the home for hedge funds, housing them, executing their trades, finding investors, providing reports, cleaning up accounts, and even providing seed money and loans. This is very profitable considering 33% of volume in the market is hedge fund activity.
While times were good, the relationship was cozy. Now that the order of the day is deleveraging and the levered hedge funds, stuck in illiquid positions, are now more of a liability than an asset. The loans outstanding at UBS total more than $400B and cash on hand is $19B. Sounds impressive, but Bear had $17B on hand the day it folded. With the obvious implied leverage there is no doubt in my mind that UBS has been busy at the Fed discount window trading securities for treasuries that people will take for cash. The problem is that the Fed is lending only for 28 days. Every 28 days the value of the mortgage backed securities that UBS directly or indirectly is exposed to goes down in value. The house decline will not stop any time soon. So the predicament at UBS will continue to be more precarious as the weeks go by.
The Scorecard
Position #1: C
Direction: Short
Start Price: 27.3
Current Price: 23.78
Start Date: Jan 13, 2008
Position #2: UBS
Direction: Short
Start Price: Not reached yet
Current Price: 29.56
Start Date: TBD
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11 comments:
UBS looking for new investors. New capital infusions will continue to dilute shareholder value and increase the likelihood of stock price decline.
Financial Times
Tuesday Mar 25 2008 14:50
"Sometime in the next five days, UBS (NYSE:UBS) shareholders will receive a letter with the agenda for next month's annual meeting of Switzerland's biggest bank.
Rather than being destined straight for the waste bin, the procedural details this time should warrant closer attention for what they might reveal about Europe's biggest casualty of the subprime crisis.
Already, a small pension fund has tabled a motion for a SFr10bn ($9.9bn) rights issue to help UBS address possible further writedowns on its securities linked to US residential mortgages.
Another capital raising may seem superfluous after last month's approval for steps to raise SFr19bn in funds, mainly through a SFr13bn injection from strategic investors in Singapore and the Middle East. But Profond, a SFr2.5bn pension fund for small and medium-sized Swiss companies, thinks more cash is needed to address the bank's looming new losses.
...Herbert Brändli, chairman of Profond's board of trustees, says he has been told his motion will be on the agenda. More important, Mr Brändli says he has been told privately by the bank that another capital increase will be necessary - confirming the view of many in the market that only an additional infusion of funds will suffice to maintain the capital ratios UBS requires to protect the crucial blue chip image of its powerhouse private banking business.
http://us.ft.com/ftgateway/superpage.ft?news_id=fto032520081601305455&page=2
Chris "Where there is smoke, there is a fire!!!"
UBS marking down value of auction-rate securities
Marketwatch: 3/28/08
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UBS 27.77, -1.36, -4.7%) is marking down the value of auction-rate securities in brokerage accounts, The Wall Street Journal reported on its Web site Friday, citing people familiar with the matter. Up until now, UBS customers unable to sell securities in regularly scheduled auctions were told the securities retained full value and would receive higher interest rates, the newspaper reported. UBS will mark down the securities Friday afternoon from a few percentage points to more than 20% and inform clients online, according to the Journal
http://www.marketwatch.com/News/Story/Story.aspx?guid={86DDE232-F3AC-4020-BA6B-A611F9F3642D}&siteid=yhoo&dist=yhoo
cdulan: Q1 2008 $19B writedown above my estimates of $11B. New rights issue will further subordinate shareholder equity and dilute value. Current dividend unsustainable due to the loss of $12B in capital vs. end of Q4 07 shareholder equity of $35B. That is 1/3 of shareholder equity erased in 90 days. CEO quits. UBS also believes this is the end of the writedowns. I will evaluate that once I see the marks for this quarter.
Here is the press release...
UBS Unveils $12B Loss, Write-Downs of $19 Billion; Chairman Marcel Ospel Steps Down
ZURICH, Switzerland (AP) -- UBS AG's chairman abruptly resigned Tuesday as the Swiss bank reported a first-quarter loss of $12.1 billion and said it would seek $15.1 billion in new capital.
...
UBS write-downs for the past nine months have reached $37.4 billion, the largest reported by any bank to date.
Standard & Poor's cut the bank's credit rating one notch to AA-, citing "risk management lapses, earnings volatility and need for new capital."
UBS said that after it raises new capital, its Tier 1 capital ratio, a key indicator of a bank's ability to absorb losses, would be about 10.6 percent. That is well above minimum European requirements of 4 percent
...
Ospel said he was ultimately responsible for the bank's health as he stepped down.
...
The bank said its move to raise capital through a rights issue that would be fully underwritten by four leading international banks and would enable it to remain "one of the world's strongest and best capitalized banks."
cdulan: Q1 2008 $19B writedown above my estimates of $11B. New rights issue will further subordinate shareholder equity and dilute value. Current dividend unsustainable due to the loss of $12B in capital vs. end of Q4 07 shareholder equity of $35B. That is 1/3 of shareholder equity erased in 90 days. CEO quits. UBS also believes this is the end of the writedowns. I will evaluate that once I see the marks for this quarter.
Here is the press release...
UBS Unveils $12B Loss, Write-Downs of $19 Billion; Chairman Marcel Ospel Steps Down
ZURICH, Switzerland (AP) -- UBS AG's chairman abruptly resigned Tuesday as the Swiss bank reported a first-quarter loss of $12.1 billion and said it would seek $15.1 billion in new capital.
...
UBS write-downs for the past nine months have reached $37.4 billion, the largest reported by any bank to date.
Standard & Poor's cut the bank's credit rating one notch to AA-, citing "risk management lapses, earnings volatility and need for new capital."
UBS said that after it raises new capital, its Tier 1 capital ratio, a key indicator of a bank's ability to absorb losses, would be about 10.6 percent. That is well above minimum European requirements of 4 percent
...
Ospel said he was ultimately responsible for the bank's health as he stepped down.
...
The bank said its move to raise capital through a rights issue that would be fully underwritten by four leading international banks and would enable it to remain "one of the world's strongest and best capitalized banks."
cdulan: UBS is attempting to create it's own "Resolution Trust Corp" so it can start presenting good numbers to Wall Street. What they don't tell you is that on balance sheet or off balance sheet, UBS will be spending billions to support this entity for years.
BlackRock Nearing Deal on UBS Mortgage Assets
Published: May 5, 2008 Private equity titan BlackRock Inc. (BLK: 215.40, -0.39%) is in early-stage negotiations with UBS AG (UBS: 34.31, -1.41%), Switzerland’s largest bank, to take over and manage its remaining U.S. mortgage assets, Bloomberg News reported Monday. UBS has been sent reeling by more than $38 billion in subprime and mortgage-related write-downs in the past 12 months, and is expected to post another hefty loss in first quarter earnings scheduled for release Tuesday morning.
Via Bloomberg’s coverage:
BlackRock, the manager of almost $1.4 trillion of assets, is seeking cash from investors to create a new entity that would hold and eventually sell the mortgage assets of Zurich-based UBS as the markets recover. New York-based BlackRock is targeting returns of more than 15 percent, said the people, who asked not to be identified because they aren’t authorized to disclose the information. The talks may not lead to an agreement, they said.
“It’s tremendous news for the economy once the banks are willing to seriously start shedding these assets,” said Roger Kormendi, a principal at Washington-based investment bank Kormendi\Gardner Partners, who helped the U.S. design the partnerships that liquidated bad loans during the savings and loan crisis in the early 1990s. “This is the right thing to do.”
It’s worth noting that BlackRock recently helped bankroll PennyMac, a distressed asset servicer headed up by Countrywide expat Stanford Kurland. Sources tell HW that the negotiations with UBS would likely involve the use of the newly-funded PennyMac platform to manage the assets until they could later be sold at a profit.
Bloomberg reports that BlackRock is holding similar negotiations with other financial institutions, essentially exploring the formation of a “bad bank” that would take chunks of distressed mortgages and assets tied to them off of the balance sheet of affected banks, and hold them until they could be disposed of at a profit.
News of BlackRock’s move towards UBS comes as numerous other private equity and hedge fund players are saddling up to ride back into what’s left of a decimated mortgage market, in an attempt to recover value from assets — either whole loans or the securitized paper tied to them — that some say have been pushed below their intrinsic value by current market conditions.
UBS is expected to report roughly $11.4 billion in additional write-downs when it releases first quarter earnings Tuesday morning, as well as possible layoffs amounting to 10 percent of the more than 80,000 employees at the firm.
Disclosure: The author held no positions in BLK or UBS when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
cdulan: Shares are being diluted by 35% and valued at $21/share in the offering? Why should any savvy investor pay the current market price of $29/share? In addition, the new liquidity alone should bring the price down. This also does nothing to solve the fundamental problem that UBS is supporting insolvent hedge funds.
UBS prices $15.6 billion share sale at 31% discount
MarketWatch, May 22nd
Swiss banking giant UBS on Thursday said it will sell new shares at a nearly one-third discount to raise the 16 billion Swiss francs ($15.6 billion) it needs to strengthen its balance sheet.
The firm, which has been Europe's biggest casualty of the credit crisis, said shareholders will be able to buy seven new shares for every 20 they hold at a price of 21 francs a share. That represents a hefty 31% discount to Wednesday's closing price of 30.64 francs. UBS ... said at the start of April that it would need to raise the cash after revealing a further $19 billion of write-downs from the credit crisis.
http://www.marketwatch.com/news/story/ubs-prices-156-billion-share/story.aspx?guid=%7BCB7AC7CD%2DF834%2D4F15%2D9A06%2DB66FB3138D2D%7D&siteid=yhoof
UBS Sells Off
Distressed Funds
May 22, 2008
Swiss bank UBS AG said Wednesday that it has completed the sale of troubled mortgage-backed securities to a distressed-asset fund at a discount, indicative of its efforts to reduce risky positions. UBS said it sold assets of the subprime and Alt-A category with a nominal value of $22 billion for about $15 billion to a special investment vehicle led by U.S. fund BlackRock Inc., 49% owned by Merrill Lynch & Co. As part of the deal, UBS is providing BlackRock with a multiyear collateralized term loan of $11.25 billion with which to buy the securities.
cdulan: The equivalent of moving the assets off balance sheet with none of the upside.
UBS Pays Lip Service
May 21, 2008
LONDON - Swiss bank UBS's grand plan to offload some of its unpalatable mortgage-backed assets and reduce its risk doesn’t seem to amount to much at all.
On Wednesday UBS ( fell 3.3%, or 1.04 Swiss francs ($1.01), to 30.70 Swiss francs ($29.84) in afternoon trading in Zurich as it unveiled the details of its plans to sell $15 billion of Alt-A and U.S. subprime residential securities to a fund managed by investment firm BlackRock. The assets are being sold at a 32.0% discount to their $22 billion book value, inline with expectations. Not expected was the structure of the deal, which leaves UBS exposed to further losses on the assets. (See: "BlackRock To Buy UBS Mortgage Assets" )
Just 25.0% of the funding, or $3.8 billion is coming from equity raised by BlackRock from investors, with the remaining $11.2 billion being financed by a collateralized loan from UBS.
This effectively means that UBS gets first loss protection if the assets lose up to 25.0% of their current value, but leaves the bank exposed to any losses beyond that.
"By selling these assets to BlackRock UBS will reduce its risk-rated assets, which will have a positive impact on our tier 1 ratio of approximately 20 to 25 basis points," UBS spokesman Dominik von Arx told Forbes.com.
Under the agreement with BlackRock, UBS will share performance fees from the fund after a hurdle rate of return goes to equity investors. Von Arx declined to say what this hurdle rate would be.
"It’s better than nothing," said Helvea analyst Peter Thorne.
UBS's $38.0 billion investment losses triggered by the collapse of the U.S. subprime mortgage market, are the second worst, after Citigroup's, suffered so far by any banking institution. The bank has acknowledged that its risk management system was partly to blame, and has pledged to cut back its exposure to risky assets. The bank cut its exposure to subprime and Alt A to $33 billion at the end of March, from $54.3 billion at the end of December. (See: "UBS' Subprime Postmortem" )
"Risk reduction remains a critical part of our ongoing financial restructuring and this sale is a big step towards reducing our positions in this asset class," said UBS Chief Executive Marcel Rohner on Wednesday.
A step maybe, but hardly a big one.
http://www.forbes.com/2008/05/21/ubs-blackrock-subprime-markets-equities-cx_vr_0521markets12.html?partner=yahootix
Citibank has reached below $17/share. The position has been closed at a 37% gain.
Banks have always managed to get themselves into trouble.
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