The Swiss government has stepped in to rescue UBS, the European bank worst hit by the subprime crisis.The Swiss National Bank (SNB) will take on up to $60 billion in illiquid assets from UBS, the bank announced today. The assets will go into a special-purpose vehicle (SPV) backed by $6 billion of equity capital from UBS and a loan of up to $54 billion from the SNB, priced at one-month dollar Libor plus 250 basis points. Under the agreement, the SNB will then buy the equity from UBS for $1, leaving UBS with an option to buy it back, once the SNB loan is fully repaid, for $1 billion plus half the equity value over $1 billion. (If the equity value is $3 billion, for example, UBS will pay $2 billion.) UBS will raise the original equity stake by issuing $6 billion in convertible debt to the Swiss federal government, and will run the SPV under the supervision of the SNB. Setting up the SPV will free UBS of almost all its net exposure to US residential and commercial mortgages, student loans and reference-linked notes, the bank said – the SPV will take on $31 billion of securities in these categories. It will also take on another $18 billion in "a wide range of securities", and may later take $5 billion of student loan auction rate securities that UBS has been ordered to buy back from investors, and up to $3.5 billion in "positions that may become unhedged in the event of commutation of the credit protection contracts with one or more monoline insurers". The assets will be managed for "orderly liquidation", the SNB said, adding "it is SNB's view that these assets are of real value. By establishing the SPV, it will be possible to sell them in the medium term or hold them until maturity." UBS said the move would cost approximately SFr4 billion and would give it Tier 1 capital of 11.5% by year end. Conversion of the debt held by the Swiss government would leave it with a 9.3% stake in UBS. Credit Suisse, which today raised SFr10.4 billion from a group of foreign investors led by Qatar Holding, part of the Qatar Investment Authority, had been offered a similar deal but had refused, the SNB said.
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