UBS rights issue likely to set trend

UBS’s rights issue will rank among the largest of its kind for a financial institution, and is expected to prompt rival banks to consider similar capital raisings.

The Swiss bank’s SFr15bn cash-call amounts to almost 25 per cent of its market capitalisation at Tuesday’s market close, making it comparable in size to rights issues typically associated with large acquisitions.

Investment banks including UBS have turned to strategic investors such as sovereign wealth funds for rescue capital since the credit crisis began last summer. However, Société Générale, UBS’s French rival, broke new ground by using a rights issue to plug the hole left by an alleged trading fraud uncovered in January.

Given the scale of UBS’s capital needs, the bank had little choice but to use a rights issue too. It has turned to some of its sharpest rivals to underwrite the fundraising, which is being led by the two US banks that handled SocGen’s rights issue – Morgan Stanley and JPMorgan – supplemented by Goldman Sachs and BNP Paribas.

The terms have yet to be disclosed other than that a maximum of 1.25bn shares could be issued. That would imply an subscription price for the newly issued shares at a thumping 63 per cent discount to UBS’s closing share price on Tuesday.

A discount on that scale would be unusual, and bankers expect something below 40 per cent. Either way, UBS’s cash is guaranteed.

The wider the discount, the less risk that the underwriters are left having to buy the share issue themselves.

Bankers said that other European banks were likely to need rights issues too, and were likely to take heart from the positive reaction to UBS’s admission that it needed to shore up its balance sheet.

The rights issue will mean renegotiating the terms of a capital raising with the Government Investment Corporation of Singapore, which last year agreed to inject SFr11bn into UBS in the form of convertible preference shares.

GIC said it had been consulted by UBS about the writedowns and board changes and, as a long-term investor, was supportive of the moves.

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