Surprise, surprise. Consider this a holiday surprise as many are out in the U.S. for Memorial Day and in the UK for the Bank Holiday. Multiple sources were reporting that UBS warned in its 985-page capital raising prospectus late on Friday that it anticipates potential further losses in its non-U.S. property portfolio. Well, I could have told you this was coming. And they are only the first of many to so warn.
The Times of London says:
In its prospectus, which was posted to investors on Friday, it said: “These include exposures to nonU.S. residential and commercial real estate and mortgages. UBS has recorded losses on such positions in 2007 and first quarter 2008 but markdowns and losses could increase in the future.”
UBS said last week that it would sell $22 billion (£11 billion) of sub-prime and United States residential mortgage-backed securities to BlackRock for $15 billion, with UBS providing the fund manager an $11.25 billion loan in the process.
UBS is Europe’s largest sub-prime casualty so far, having written down about $37 billion of assets hit by the lending crisis in the United States. UBS shares have dropped 52 per cent in New York this year, cutting its market value to $61.1 billion.
The bank still has more than $45 billion in United States mortgage-related assets, $8.6 billion in leveraged finance commitments and $10.4 billion in United States student loans on its books.
UBS shareholders can start subscribing for shares in the rights offer, which allows them to purchase seven new shares for every 20 held at SwFr21 each. The bank plans to sell 760.3 million new shares, which are due to start trading on June 13, to raise net proceeds of about SwFr15.5 billion.
The rights, which are fully underwritten, will be offered to existing shareholders at a discount of more than 30 per cent.
The bank has gone to its existing owners for fresh equity as an increasing number of its European rivals are trying to repair dented balance sheets.
Recently, the Swiss Banking authorities revealed they are increasing capital ratio requirements. The comments in the prospectus for the UBS capital raising efforts suggest that UBS wants to get ahead of the curve in order to maintain a sufficient capital ratio even in the event of further losses. While these developments may be admirable for the Swiss Bank in bolstering its bona fides, they do represent a significant deleveraging, which should only lead to slower credit growth, slower money velocity, and a further tightening in credit globally.
One should fully anticipate that this is a warning of worse to come in writedowns in non-U.S. markets, particularly in Spain and the UK. Be prepared for similar warnings and writedowns across a spectrum of financial institutions as the housing markets sour globally. This is further evidence of why George Soros and Warren Buffett are amongst those who foresee a slowdown of epic proportions in this particular downturn.
Sources
UBS Falls After Saying More Mortgage Losses Possible Bloomberg News
See also: Credit Crisis Timeline for a full list of writedowns and capital raising by institution and a timeline of the credit crunch.