Published August 21, 2009

GIC gives UBS share sale a miss

Swiss government divests entire stake to institutional investors, raking in 1.2b franc profit

By CONRAD TAN
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(SINGAPORE) The Swiss government has sold its entire 9.3 per cent stake in UBS for a tidy profit, less than a year after it poured six billion Swiss francs (S$8.15 billion) into the country's biggest bank.

The Government of Singapore Investment Corporation (GIC) said it did not buy any of the UBS shares sold by the Swiss government, but added that it remains confident of the long-term prospects of its earlier investment.

The Swiss government sold all 332.2 million UBS shares it controls to institutional investors for 16.50 francs each, or a total of some 5.48 billion francs, yesterday, the Swiss Federal Department of Finance said in a statement in German on its website.

The government will receive another 1.8 billion francs in cash from UBS as payment for waiving its right to future coupon payments on the mandatory convertible notes through which it held its investment in the bank.

Such notes earn interest like debt, but must be exchanged for ordinary shares by a fixed maturity date. The notes held by the Swiss government paid interest of 12.5 per cent a year, and were due to mature in June 2011.

In total, the government will receive 7.2 billion francs, or a profit of 1.2 billion francs on the sale of its six billion franc investment in UBS, it said.



To complete the sale, the notes will be converted into 332.2 million new UBS shares on Aug 25, which will then be transferred to the buyers.

The Swiss government disposed of its UBS investment just a day after signing an agreement with the US government to release data on some 4,450 American clients of UBS suspected of evading taxes.

'GIC did not participate in the placement of UBS shares. As a large investor in UBS, we maintain our confidence in the long-term prospects,' a GIC spokeswoman said yesterday when contacted by BT.

'We do not comment on the specifics of our investments,' she added.

BT's calculations show that GIC's own investment of 11 billion francs in UBS mandatory convertible notes is worth just four billion francs at the bank's current share price, despite clauses designed to safeguard the investment that were included in the original investment agreement in December 2007.

That excludes the two yearly coupons of 9 per cent, or 990 million francs each, that GIC is entitled to over the two-year term of the UBS notes it holds. Based on the original agreement, GIC would have received the first coupon payment in March this year.

The Swiss government's exit leaves GIC as the largest shareholder of UBS, Reuters reported, citing people familiar with the bank.

The Swiss government invested six billion francs in mandatory convertible notes issued by UBS last year, as part of a US$60 billion support package that also included US$54 billion in state backing for the bank's soured debt securities.

The capital injection by the government effectively diluted the stakes of earlier investors in UBS, including GIC.

In December 2007, GIC agreed to invest 11 billion francs in mandatory convertible notes issued by UBS, alongside an unnamed Middle East investor who bought another two billion francs worth of the notes.

The mandatory conversion feature of the notes held by GIC and the Middle East investor means that they must be exchanged for UBS shares by the time they mature on March 5, 2010 - two years after the notes were first issued.

Various safeguards were built into the investment agreement, including provisions to protect the investors' stakes from being diluted, which kicked in when UBS issued some 16 billion francs worth of new shares in a rights offer in June 2008.

According to UBS's 2008 annual report published in March this year, the 13 billion francs worth of notes held by GIC and the Middle East investor are convertible into 270.4 million UBS shares.

'As a result of anti-dilution adjustments triggered by the June 2008 capital increase, the initial conversion prices were adjusted and the (notes) will be converted into a fixed number of 270,438,942 shares,' the report says.

GIC's portion of the 13 billion franc investment means that it would receive some 228.83 million UBS shares when the notes are converted.

At yesterday's closing price of 17.50 francs for UBS shares, those shares would be worth just four billion francs.