UBS to seek buyers for US mortgage debt

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UBS plans to take bids on $1.5bn of commercial real estate-related securities following the success of a similar sale of crisis-era assets last week by the Federal Reserve Bank of New York.

On Wednesday the Swiss bank intends to sell securities in collateralised debt obligations that package commercial property bonds originated in 2006 and 2007.

The New York Fed last week sold securities with an original face value of $7.5bn from two commercial real estate CDOs called “Max”. The Max auction attracted strong demand and likely prompted UBS to seek bids on its CDOs, analysts said.

The CDO securities that the New York Fed sold were part of Maiden Lane III, a debt portfolio acquired as part of the bailout of AIG, the insurer, at the height of the financial crisis in 2008.

On Thursday the New York Fed plans to take bids in a second auction related to Maiden Lane III. This time it plans to sell CDO securities that package subprime home mortgage bonds which have a combined original face value of $1.6bn.

Once dismissed as “toxic”, home loan and commercial property debt that was at the centre of the financial crisis has been in demand this year as investors scour the financial markets for the highest yielding assets.

Yields on US Treasury bonds have fallen sharply in recent weeks on renewed concerns about the strength of the US recovery and the debt crisis in the eurozone. After rising to about 2.40 per cent in March, yields on 10-year Treasuries have slipped back below 2 per cent.

The securities UBS is selling are from CDOs called “Wave”. As recently as March Moody’s downgraded some of the securities to Caa1, a very low junk rating.

“There is demand in the marketplace from investors for high-yielding assets,” said Richard Hill, a strategist at RBS. “While [the Wave CDO] bonds appear to be speculative based upon their ratings, they may return significant amounts of principal.”

Analysts estimated that the yields on the securities range from about 10 per cent to the low 20s, assuming all the principal is repaid.

A joint bid from Barclays and Deutsche Bank won the auction for the Max CDOs, beating rival teams of Wall Street bidders. The banks intended to collapse the CDOs, separate the underlying bonds and sell them to investors. It remains unclear if bidders for the Wave debt also plan to dismantle the CDOs and sell the underlying bonds.

UBS suffered more than $50bn in writedowns in the credit crunch, most of them on mortgage-related paper.

Additional reporting by Haig Simonian in Zurich

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