SWITZERLAND - UBS and the Swiss National Bank (SNB) have entered into a US$60bn agreement to "materially de-risk and reduce" UBS' balance sheet with a transfer of illiquid securities to a separate fund.
Completing the transaction will reduce UBS' net risk exposure to these assets to near zero, which the bank hopes will significantly improve its ability to perform.
Marcel Rohner, group CEO of UBS, said the action was forced by the extremely difficult market environment UBS was operating in.
He added: "Our shareholders have borne the losses from this crisis. They now have the certainty that our risks related to these distressed assets have been substantially removed while still participating in the recovery of these assets."
The SNB will provide up a loan worth up to $54bn to the newly created fund, with a further $6bn of equity provided by UBS. Control of the fund will rest exclusively with the SNB.
Under the terms of the agreement, UBS will also be forced to sell its equity interest in the fund to SNB for the nominal amount of a single dollar, with the option to re-buy equity once the loan is re-paid for an agreed price of $1bn, plus half of the equity value of the fund which is greater than $1bn.
The transferred assets include about $31bn of US asset backed securities (ABS) ranging from prime to sub-prime mortgages, student loan receivables and other ABS, $18bn of non-US debt instruments and a further $9bn of other assets.
In its recent Q4 outlook, UBS said it expected a downturn over the next three months, as the industrial sector "shifts down a gear". Growth over the next quarter was predicted at 1.3%, falling to 1.0% in 2009 and recovering only slightly to 1.2% in 2010.
In a statement, the SNB said the measures were taken to strengthen the Swiss financial system: "The SNB is convinced that it will result in a sustainable reduction of strains in the Swiss financial system.
"The stabilisation thus reached will be favourable for the development of the Swiss economy as a whole and is in the interest of the country."
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