GIC to take $5bn paper loss on UBS stake

March 5, 2010
Singapore Democrats

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Kevin Brown
The Financial Times

Singapore’s main sovereign wealth fund will on Friday incur an unrealised loss of about SFr5.5bn ($5bn) on an SFr10.97bn investment in UBS, the Swiss bank that was rescued by a group of international institutions during the credit crisis.

The Government of Singapore Investment Corp, which manages assets of more than $300bn, declined to comment on the paper loss, but has previously said it plans to hold on to the shares.

GIC’s investment in UBS was in the form of a mandatory convertible bond paying a 9 per cent coupon for two years, which expires on Friday. The precise extent of the unrealised loss will depend on Friday’s closing price of UBS shares in Switzerland.

However, the shares have been trading this week at about one third of the conversion price of SFr47.7, leaving GIC facing an unrealised loss on the deal of about SFr7.5bn, minus interest payments that it has already received of about SFr2bn.

GIC rarely comments on its investment activities, but Lee Kuan Yew, the former Singapore prime minister who chairs the fund, has said that it plans to hold the stock for “two or three decades”.

Ng Kok Song, the fund’s chief investment officer, said in the annual report in September that it might take longer than initially expected to recoup the investment, but expressed “confidence” in the long-term prospects of the bank, which has become the biggest European casualty of the subprime crisis.

However, GIC did not participate in a UBS rights issue to raise just under SFr16bn in 2008.

GIC invested a total of $18bn in Citigroup and UBS when the duo sought financing in the wake of writedowns on subprime mortgages. Shares in both banks fell heavily in subsequent months, prompting criticisms of GIC’s investment timing.

The fund said in September that it had pocketed a $1.6bn profit after selling half of its 9 per cent stake in Citigroup.The sale followed the conversion of its $6.8bn of convertible preferred stock for common stock.

Temasek, another Singapore sovereign wealth fund, is estimated by analysts to have incurred a loss of between $2.3bn and $4.6bn on the sale of a 3.8 per cent holding in Bank of America, which attracted unusual public criticism in Singapore.

It is also thought to have incurred a loss on the sale of a stake of almost 2 per cent in Barclays, the UK bank, but has made no comment on that.

Both GIC and Temasek have recently said they plan to shift their investment focus more towards emerging economies, though neither has publicly ruled out further stakes in western financial institutions.

GIC is understood to be considering investing in Prudential, the UK insurer, as part of Prudential’s proposed acquisition of AIA, the Asian arm of the US insurance group AIG.

http://www.ft.com/cms/s/0/ccac00d4-2781-11df-b0f1-00144feabdc0,s01=1.html?nclick_check=1

Kevin Brown
The Financial Times