UBS plans to issue more loss-absorbing capital

Wed Feb 22, 2012 8:17am EST
 
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By Katharina Bart and Helene Durand

ZURICH (Reuters) - UBS UBSN.VX plans to sell more loss-absorbing bonds to meet tougher bank capital rules after the Swiss bank tested investor appetite for these new instruments with an initial $2 billion deal last week.

The new bonds are designed to help bolster the bank in tough times by absorbing losses. Their value can be written down if the bank's common equity Tier 1 ratio - a measure of financial strength - falls below 5 percent.

UBS's deal attracted $5.5 billion of demand from investors, which UBS said included private banks, long-only asset managers, hedge funds and banks investing for their own portfolios, in Asia and Europe.

The bank has maintained it is happy with the issue's reception, but the take-up highlights that UBS has struggled to make the issue attractive to the big institutional investors the bank will have to tap if it is to sell these bonds in bulk.

It needs to sell roughly $16 billion in total of capital instruments, measured by its target for risk-weighted assets, to meet new capital rules.

"(The) deal marks the beginning of an issuance program as we build our loss-absorbing capital base to meet FINMA and the Basel Committee requirements for systemically important banks well in advance of the regulatory deadlines," UBS's financial head Tom Naratil said.

The bank is weighing issues in other regions and currencies for upcoming issues, which are likely to exceed $1 billion in size, he said.

But institutional investors are concerned that the loss-absorption features of these bonds potentially put them behind equity investors in creditor rankings.   Continued...

 
People walk behind the logo of Swiss bank UBS in Zurich February 7, 2012.  REUTERS/Arnd Wiegmann