UBS forced to seek bail-out after extra $10bn write-down

UBS announced an emergency capital injection of SFr13bn (£5.6bn) from Singapore and the Middle East to protect its core private banking business after it shocked the market yesterday with an additional $10bn (£4.9bn) write-down from the sub-prime mortgage crisis in the US.

Switzerland's biggest bank said it would post a loss in the fourth quarter of the year and could go into the red for the full year. In October, it predicted an annual profit, despite announcing SFr4.2bn (£1.8bn) of write-downs from the credit crunch.

UBS, the world's largest wealth manager, sought the injection of funds to protect its credit rating. Wealthy clients want to put their money in the very safest places and UBS could not afford to have any doubts about the safety of its business.

"The rating is absolutely imperative," said Simon Maughan, an analyst at MF Global Securities. "They have acted now to clean it up and give themselves an extra buffer just in case. They have clearly not been able to convince the rating agencies that this was a temporary non-cash write-down rather than a permanent loss of value."

The Singapore Government Investment Corporation, which manages the city-state's foreign reserves, will buy SFr11bn (£4.7bn) of UBS convertible bonds. An unidentified Middle Eastern investor will buy SFr2bn (£800m) of the bonds, which pay 9 per cent. UBS also said it would replace its 2007 cash dividend with a stock payout and sell 36 million treasury shares which had been intended for cancellation.

UBS expects to have a Tier 1 capital ratio of 12 per cent, two points more than it is thought to need to maintain its rating. Moody's and Standard & Poor's confirmed their ratings on the bank's debt yesterday.

Marcel Rohner, UBS's chief executive, said: "Continued speculation about the ultimate value of our sub-prime holdings which remains unknowable has been distracting. In our judgement, these write-downs will create maximum clarity on this issue and will have the effect of substantially eliminating speculation."

The write-down was for holdings of collateralised debt obligations (CDOs) and supposedly top-rated "super senior" debt. The bank said its valuations of the assets were based on "extreme loss projections" reflected in a small number of sales at the end of November, but analysts remain wary that further losses could emerge. UBS's move mirrors Citigroup's recent sale of $7.5bn of convertible bonds to the Abu Dhabi Investment Authority to shore up its fragile capital position. UBS and Citi have taken the biggest hits from the sub-prime crisis.

Yesterday's news will put further pressure on UBS as it faces investors and analysts in London today for a strategy update. Marcel Ospel, the bank's chairman since 2001, said he was under no internal pressure to quit but he did not "expect or want" a bonus for 2007. The Swiss bank has traditionally been a conservative manager of rich people's money but it recently started buying, trading and packaging credit for high returns. The implosion of a hedge fund forced the departure in July of Peter Wuffli as chief executive and his replacement by Mr Rohner.

UBS's move came on a day of continuing wider fallout from the credit crunch. MBIA, the world's biggest "monoline" insurer of bonds, announced a $1bn investment from the private equity firm Warburg Pincus in an attempt to avert a forced sale of assets that could trigger a downgrade of MBIA's credit rating. A ratings downgrade for MBIA or other debt insurers could cause knock-on downgrades to the ratings of the bonds they insure. That scenario could spark a further wave of credit-crunch write-downs by banks and other institutions that hold the debt.

France's Socit Gnrale became the latest bank to rescue a structured investment vehicle (SIV) to avoid a fire sale of assets. SocGen will take $4.3bn of assets on to its balance sheet. The fund is among $105bn of SIVs that Moody's is considering for downgrade in its biggest wave of ratings cuts since losses on US sub-prime mortgages caused credit markets to freeze. Bank of America said it would wind down a $12bn fund after losses that included SIVs.

UBS shares closed up 1.4 per cent, but some analysts said they would fall back as investors digested the earnings dilution caused by the capital raising.