UBS May Get More Loans Through Covered Bonds

Last year, the Swiss National Bank helped troubled UBS by brokering a deal whereby three smaller Swiss banks bought covered bonds from a 2 billion Swiss franc UBS issuance—providing UBS with needed liquidity.  Now Dow Jones Newswires has picked up a report from Swiss weekly NZZ am Sonntag that another, similar deal is in the works.  If consummated, this deal would help both UBS and Credit Suisse.

The Dow Jones story describes the deal as allowing those big banks “a way of refinancing themselves at attractive terms” while offering a way for the subscribing banks to “invest excess liquidity.”  It says both banks confirmed the plans without describing the size or timing of the deal.

The reason we mention this expected European deal on Covered Bond Investor™ is that it illustrates a way that a central bank has been able to use covered bonds as a tool in the current economic crisis.   

UBS’s latest need for more cash apparently stems at least in part from charges by the SEC—settled in February—that UBS “facilitated the ability of certain U.S. clients to maintain undisclosed accounts . . . which enabled those clients to avoid paying taxes.”  U.S tax authorities continue to pursue a civil action, seeking data from UBS on 52,000 Americans.  As translated by Google's web translation tool, the NZZ am Sonntag article indicates that after a solid January, UBS customers withdrew a large amount of funds "in response to the tax dispute in the U.S.”

To be technical, in a deal such as the one reportedly in progress, UBS and Credit Suisse would not issue covered bonds directly.  Instead, they would each obtain a loan—backed by a pool of mortgages—from an authorized covered bond institution, which in turn would issue covered bonds for purchase by smaller banks.