Zurich: The Swiss government is in talks over its investment in UBS with various parties but has not yet decided to convert its debt into shares or sell them, the finance ministry said on Tuesday.
The talks come as other global banks are starting to pay back state bailouts but analysts expect the Swiss government will prove cautious until it is sure UBS is back on stable ground.
Berne agreed last October to give the biggest Swiss bank a badly-needed $5.47 billion (6 billion Swiss francs) cash injection in exchange for mandatory convertible notes (MCN) that would give it a stake of 9.3%. The lock-up period for conversion of the notes ended on Tuesday.
The finance ministry said it is examining various “transaction possibilities” in talks with several parties and the government will take a decision at the appropriate time.
It reiterated that the government only planned to stay involved for a limited period and said its main objectives were ensuring a stable financial system and the greatest possible recouping of the government’s investment.
UBS, the world’s largest wealth manager in terms of assets, was forced to accept government backing after massive investments in risky US assets forced it to make billions of writedowns and led to it posting the biggest annual loss in Swiss corporate history for 2008.
The market would welcome a decision by the Swiss state to disengage from UBS as a sign the bank is on track for recovery, but Swiss media has said financial authority FINMA is against a hasty sale of the stake.
Sale / Placement not imminent?
UBS shares were up 1.7% at 15.09 Swiss francs at 12:50 pm, outperforming a 0.9% firmer DJ Stoxx European banking index.
“The statement is in line with our expectation that government won’t decide anything by the end of the lock-up period,” Julius Baer analysts wrote in a client note.
“We could even see some higher share prices today as a sale/placement is not imminent.”
A conversion of the notes would have a dilutive effect and a sale on the market could also hit the stock, although analysts have already priced in the share dilution in earnings forecasts.
Lloyds Banking Group Plc announced on Monday it will repay about £2.56 billion ($4.1 billion) to the UK government after selling new shares and Dutch insurer Aegon said on Tuesday it aims to pay back a third of its €3 billion ($4.2 billion) in state aid this year.
US banks Morgan Stanley, JPMorgan Chase and American Express Co also said in the last week they would sell shares as they position to repay state relief
UBS, too, is seen by analysts as keen for the government to exit as quickly as possible to remove state involvement and competitive disadvantages such as demands that it complies earlier than other Swiss banks with new rules on banker pay.
However, it gave a cautious outlook last month as it reported a big first-quarter net loss, contrasting with a strong three months for some of its major rivals and UBS board member Bruno Gehrig said at the weekend the bank was “not out of the woods yet” as it was still seeing outflows of client money.
Analysts say investors from Asia and the Middle East, some of whom are already among UBS’s core shareholders, may be interested in buying the government’s stake, but mustering a consortium of Swiss investors may be difficult.
The MCNs have a duration of 30 months, or until June 2011, and carry a 12.5% annual coupon that UBS must pay until maturity even in the event of a share conversion.
If the government converts at or below the minimum reference price of 18.21 Swiss francs it will receive the maximum of 330 million shares under the terms of the agreement.
The Swiss government is already in the money for a sale as UBS shares are trading above the break-even level of 12.50 Swiss francs, taking into account the 750 million francs annual interest payments it is guaranteed until the maturity date.
Earlier this month Abu Dhabi sold 1.3 billion shares in Barclays held via mandatory convertible notes that had been due to convert by the end of June, making $2.5 billion from an investment that helped the British bank through the financial crisis. ($1=1.096 Swiss Francs)