UBS announced an agreement with the Swiss National Bank (SNB) today to transfer up to $60 billion of currently illiquid securities and other assets from its balance sheet to a separate fund entity. These assets include $31 billion of primarily cash securities made up of U.S. subprime, U.S. Alt-A, U.S. prime, U.S. CMBS and RMBS, U.S. student loan auction rate certificates and other securities backed by student loans, and U.S. reference-linked note programs.


Here is how the deal will work: UBS will transfer up to $60 billion of assets to a newly created fund entity and will capitalize the fund with equity of up to $6 billion.


In order to fund its equity contribution, and maintain a strong capital position, UBS can raise CHF 6 billion of new capital in the form of mandatory convertible notes (MCN). The MCN has been fully placed with the Swiss Confederation.

The SNB will finance the fund with a loan of up to $54 billion, secured by the assets of the fund. The SNB will also take over control and ownership of the entity by purchasing the equity for $1. The loan will be non-recourse to UBS, based on no change of control of UBS and will be priced at Libor plus 250 basis points. It will mature in eight years, but the maturity may be extended to 10 or 12 years.

At completion of the transaction, UBS's net exposure in these risk categories will be reduced to nearly zero, according to the bank. The bank will hold residual long positions in these asset classes hedged through existing short positions.

UBS will also transfer an additional $18 billion to the fund of mainly non-US debt instruments backed by a variety of asset classes.


During 4Q08 or 1Q09, UBS will transfer $49 billion of assets priced as of Sept. 30, 2008. UBS will have the right to transfer up to an additional $9 billion of assets into the fund at a later date. These assets include up to $5 billion of student loan auction rate securities the bank may buy back from clients as part of the recent settlements and up to $3.5 billion of positions which may become unhedged in the event of commutation of the credit protection contracts with one or more monoline insurers.

UBS will act as the investment manager for the fund, and has the option to buy back the equity of the entity, once the loan is fully repaid. Any remaining equity up to $1 billion will go to the SNB and UBS has access to 50% of the equity value exceeding $1 billion.

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