UBS clears rescue loan; to buy back toxic assets

Swiss banking giant UBS AG, which was bailed out by the Swiss National Bank (SNB) at the height of the global financial crisis, has moved a step closer to buying back the stabilisation fund with toxic assets, as the bank has repaid the loan it received from the central bank in full.

UBS may now exercise an option to repurchase the so-called StabFund which was created by SNB in 2008 to separate out the illiquid assets of the beleaguered bank. The deal price will be determined on the basis of the value of the assets remaining in the fund's portfolio, SNB said in a statement yesterday.

The assets have now become profitable as the markets improved and made a profit of $830 million in the first half of the year.

As an initial step, the assets will be valued by independent agents. The valuation and subsequent transaction are expected to take approximately three months, SNB said.

Under the agreed terms, the first $1 billion of the remaining equity capital will accrue to the SNB and the rest will be divided equally between the SNB and UBS.

In 2008, following the global financial crisis, the Swiss government took a series of measures to avoid the collapse of UBS, the country's largest bank.

The steps included acquisition of UBS mandatory convertible notes worth billions of Swiss francs subscribed to by the Swiss Confederation and toxic assets acquired by the SNB. These assets were transferred to SNB StabFund during the period from December 2008 to April 2009.

Assets worth $38.7 billion were thus acquired by the fund in the process, although it was initially designed to cope up with $60 billion of illiquid assets.

SNB financed the deal by providing a $25.8-billion loan and an equity contribution of $3.9 billion, while UBS paid $3.9 billion to SNB for the purchase of the option, according to the statement.

Last month, UBS said that it would repurchase the assets detached from the bank and the eventual buy back of the securities would be an important step which will close this chapter in the firm's history with a positive outcome.

The repurchase is expected to add $1-$2.1 billion to the bank's balance sheet in the fourth quarter.

Through the buy back, UBS expects to improve its Basel III core tier one capital ratio by 70-90 basis points and leverage ratio by 2.5 basic points, which currently stands at 11.2 per cent and 2.9 per cent respectively.