UBS stake may be worth 70 percent less as GIC converts

Saeed Azhar

Singapore sovereign wealth fund GIC will convert 11 billion Swiss francs ($10.33 billion) worth of UBS notes into shares next month at a price that may erode the value of its stake in the Swiss bank by 70 percent.

The Government of Singapore Investment Corp (GIC), which manages over $200 billion in assets, was one of the first sovereign funds to pump billions into Western banks, which were rocked by the financial crisis and suffered deep losses.

The potential loss is likely to draw fire from Singaporeans, who have been highly critical of sister wealth fund Temasek after it lost heavily betting on Western banks such as Bank of America-Merrill Lynch and Barclays.

GIC, which invested in UBS two years ago, will exchange the mandatory convertible notes for 230.7 million ordinary shares of UBS on March 5, according to a filing with the U.S. Securities and Exchange Commission.

Based on Reuters calculations, the assumed conversion price will be 47.7 Swiss francs a share versus UBS’s last closing price of 13.67 Swiss francs.

GIC declined to comment.

The wealth fund, though, will be earning 2 billion Swiss francs on its UBS investment through a 9 percent fixed coupon, which could partially compensate for the stake erosion.

In any case, GIC, which manages the Singapore central bank’s reserves and aims to beat inflation over the long-term, is unlikely to change in the wake of the potential loss.

“I sense their philosophy is you win some and you lose some. Clearly they didn’t win this one,” said David Cohen, an economist at consultancy Action Economics.

“They weren’t the only ones that lost money from the financial crisis. They will try to maintain a diversified portfolio,” Cohen added.

GIC’s strategy could be different from that of Temasek, which has been more cautious since the bank investments and has done very few blockbuster deals. It has largely bought small stakes in Chinese firms, IPOs or has supported its portfolio companies.

Too early

GIC Chairman Lee Kuan Yew, Singapore’s prime minister from 1959 to 1990, said last year the fund bought “too early” into global banks such as Citigroup and UBS, which were both hammered by the financial meltdown.

Under the original agreement between GIC and UBS, the minimum conversion price was 51.48 Swiss francs and the maximum 60.23 Swiss francs, but GIC officials had said there was a reset due to anti-dilution clauses.

The filing showed that GIC would have a stake of 6.6 percent in UBS after the notes are converted into shares.

The fund said in September its investment in UBS was still showing a loss.

Melvyn Teo, director of the BNP Paribas Hedge Fund Center at Singapore Management University, said it would be interesting to see if GIC holds on to all its UBS shares after the conversion, given the many problems still facing the Swiss bank.

“The question is, can UBS bounce back? It has lost market share to Credit Suisse and other Swiss banks and there are also some questions hovering over the Swiss private banking industry,” he said.

News of GIC’s losses on UBS comes just a month after the fund said it booked losses on its $675 million investment in Stuyvesant Town/Peter Cooper Village complex, an apartment complex in Manhattan, New York.

GIC, which is led by Deputy Chairman Tony Tan, is becoming active again in global markets after its portfolio shrank by more than a fifth in its last financial year that ended in March, when it was hit by the financial crisis that drove down the value of its financial holdings.

A market recovery helped it recoup half its portfolio losses between March and end-September last year, and GIC recently profited from a well timed sale of part of its Citigroup stake after it converted its preferred shares into stock.

GIC’s recent investments have been diverse, ranging from the hotel industry and China property developer Longfor to a videogaming firm, but are in line with a recent statement that it is not pursuing geographical targets.

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