UBS declines on report “fire sale” may lead to more writedowns

March 8, 2008
Singapore Democrats

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Elena Logutenkova & Sarah Jones
Bloomberg
7 Mar 08

UBS AG fell to a five-year low in Swiss trading after JPMorgan Chase & Co. analysts said it probably sold 25 billion francs ($24 billion) of mortgage-backed securities in a “fire sale” and may have more writedowns.

Europe’s biggest bank by assets fell as much as 4.2 percent to 30.88 francs after analysts including Kian Abouhossein raised their markdown forecast to 18.5 billion francs ($17.9 billion) from 15 billion francs. Merrill Lynch & Co. and Morgan Stanley also forecast wider losses at UBS from a sell-off of so-called Alt-A home loans to borrowers with better than subprime credit.

“It is highly likely that UBS sold its 25 billion-franc face value prime Alt-A portfolio in a fire sale,” Abouhossein wrote in the note, dated March 5. “We believe UBS would be willing to aggressively reduce structured credit assets to clean up the book.”

UBS marked down about $19 billion last year, posting the first annual loss since the Zurich-based bank was created in 1998. Valuations of AAA rated securities backed by Alt-A loans, which range between prime and subprime in their likelihood to default, fell as much as 15 percent last month, U.S. lender Thornburg Mortgage Inc. has said.

The Swiss bank traded down 2 percent at 31.60 francs as of 11:44 a.m. The company has declined 55 percent in the past 12 months, giving it a market value of 65.5 billion francs.

UBS spokeswoman Tatjana Domke declined to comment on the analysts’ reports.

No dividend

Merrill analyst Derek de Vries increased his forecast for markdowns at UBS to $21 billion from $13 billion, and Morgan Stanley analysts raised their estimate to as much as $25 billion.

Abouhossein and Morgan Stanley’s Huw Van Steenis and Solveig Babinet forecast the company will not pay a dividend this year. Even with no dividend payment, UBS may have to raise capital again if writedowns exceed $16 billion, Merrill’s De Vries said.

UBS already sold 13 billion francs in bonds that will convert into shares to investors in Singapore and the Middle East, and said it will resell treasury shares to replenish capital. Last month, shareholders also approved a plan to replace the 2007 cash dividend with stock.

To cut debt assets affected by the subprime crisis, the bank put a group of about 50 traders in charge of managing and reducing more than $70 billion in securities.

“UBS has set a new strategic direction with the asset fire sale, following a period of mainly orderly asset sales within the global banking system,” Abouhossein wrote, lowering his share- price estimate by 1 franc to 55 francs. “UBS actions have led to a spilling over into credit-market prices.”

Prices of about 70 cents on the dollar for the Alt-A assets in the fire sale are “realistic,” Abouhossein said.

UBS held $21.2 billion in AAA rated Alt-A securities at the end of last year, which were marked down on average to 96 cents on the dollar, and an additional $5.4 billion in other Alt-A assets, whose value was taken down on average to 61 cents on the dollar.

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