SWITZERLAND - Swiss bank UBS has created a standalone fund which allows the firm to rid itself of illiquid assets burning its balance sheet and raise capital through the Swiss central bank.

Up to $60bn (€44bn) of what are described illiquid securities will be transferred into a separate fund entity in an agreement with the Swiss National Bank (SNB), UBS announced today.

UBS will raise CHF6bn (€4bn) of new capital in the form of mandatory convertible notes (MCN) which have been placed with the state of Switzerland via the Swiss Confederation.

"These are very important steps to bring us back on track to a more normal operating mode," said Marcel Rohner, chief executive of UBS in an analysts' conference call this morning.

"The point of the transaction with the SNB was to get rid of the illiquid assets which have hurt us very much," confirmed the group's new CFO John Cryan

UBS is convinced these measures, together with earlier similar deals and a restructuring of the bank's organisation, will help reverse the asset outflows which according to Rohner are "a key concern". (See earlier IPE articles: UBS disposes of subprime-related embarrassment and UBS moves for a three-way split)

"Losing money is a sign of a lack of client confidence - therefore we have taken these very comprehensive set of measures to restore [confidence] and increase profitability," he argued.

UBS is not accruing a dividend for 2008 though Cryan said "we expect to be significantly profitable next year and intend to pay out a dividend in 2010 for the calendar year of 2009".

The new measures are also designed to decrease the bank's risk-weighted assets by around CHF30bn to just over CHF330bn.

"The new fund will be capitalized with up to $6bn of equity capital provided by UBS and a non-recourse loan in the maximum amount of $54bn provided to the fund by the SNB," UBS noted.

"UBS will sell its equity interests to SNB for $1 and will have an option to repurchase the equity once the loan is fully repaid for a purchase price of $1bn plus half of the equity value exceeding $1bn."

Rohner said more details on the re-purchasing will be made available on 4 November when the bank presents its Q3 2008 results.

The CEO said the firm opted for a capital increase through the central bank rather than through rights issue as it "would have been an option but not a realistic one in the time frame we had".

In return for becoming a shareholder in UBS, the Swiss Confederation "would like investor-type relations with us", explained Cryan.

UBS has also consented to put its pay structures in line with international best practice  - and the Swiss Banking Control (EBK) "is watching over that".

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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