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GIC faces possible US$4b loss on UBS bet

Tuesday, May 16, 2017 - 23:40

[LONDON] Singapore sovereign wealth fund GIC Private Limited is facing a loss in excess of US$4 billion on its emergency investment in Swiss bank UBS Group nine years ago, according to IFR calculations.

GIC cut its stake in UBS on Monday evening, selling 93 million shares at 16.10 Swiss francs each to bring in 1.5 billion Swiss francs (S$2.10 billion). The sale was conducted by UBS as sole bookrunner and wrapped up in two and a half hours.

The bank accidentally announced the sale ahead of the market close when it had been due to launch. UBS's ECM bankers were already talking to investors through a wall-crossing exercise so the deal was not too disrupted.

The share price did drop on the news so the discount was 3 per cent to Monday's close and 4.6 per cent to the undisturbed share price, but pricing was still above the bottom of the 16 Swiss francs to market guidance at launch.

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The deal was covered in 20 minutes and allocations reflected strong support from some investors, with the top 10 orders receiving half the shares. There were around 140 lines in the book.

The Singapore state vehicle invested 11 billion Swiss francs in UBS through mandatory convertibles in December 2007, which converted into shares two years later to make it the bank's biggest shareholder. GIC said Monday's sale realised a loss, but did not say how big the loss was.

IFR calculates it has lost over 4 billion Swiss francs (S$5.61 billion) on the investment, based on conservative estimates of income from share sales, interest payments on the original instruments, dividends and the value of its remaining 2.7 per cent stake.

GIC did not immediately reply to requests for comment on the size of its loss.

It said on Monday it was disappointed its investment resulted in a loss, but said an emergency investment in Citigroup at around the same time had earned a positive return, and the combined return "has been positive in mark-to-market terms".

It invested US$6.9 billion in Citigroup in January 2008.

"GIC made the UBS sale despite the loss because conditions have changed fundamentally since GIC invested ... as have UBS's strategy and business," GIC chief executive Lim Chow Kiat said. "It makes sense now for GIC to reduce its ownership of UBS and redeploy these resources elsewhere," he added.

GIC's investment in UBS has always been complex and it gives limited details on its portfolio.

GIC and an unnamed Middle East investor invested 13 billion Swiss francs in UBS in December 2007. At that time UBS shares were trading at about 50 Swiss francs, as the scale of capital and trading problems were only just emerging.

The investment was in mandatory convertible notes (MCNs) that were converted into 273 million UBS shares in March 2010. They were converted at 47.68 Swiss francs per share, well above UBS's share at the time to reflect the higher share price at the time of the original investment.

The conversion left GIC with 245.5 million shares in the bank for a 6.4 per cent stake. It reduced its holding to 196 million prior to Monday's sale, which would have raised 1.1 billion Swiss francs only if it was sold at the maximum share price during the intervening period.

Its remaining 2.7 per cent UBS stake, or about 103 million shares, is worth 1.7 billion Swiss francs at the current share price.

As a result, the sale of shares and remaining holding totals about 4.3 billion Swiss francs for GIC.

GIC received an additional 2 billion Swiss francs in interest payments in the two years it held the MCNs. The notes paid 9 per cent annual interest, but had a maximum life of two years.

It has also received 2.45 Swiss francs per share in dividend payments between 2011 and 2016, amounting to up to 602 million Swiss francs.

As a result, its total return has been 5.2 billion Swiss francs to date, with it still holding 1.7 billion Swiss francs of shares. That equates to a current loss of 4.1 billion Swiss francs from its investment, according to IFR calculations.

GIC manages more than US$100 billion globally and UBS was its second most valuable investment, according to Thomson Reuters data. It was set up in 1981 to secure the financial future of Singapore by managing its foreign reserves in a range of long-term assets.

Temasek, another Singapore state investor, has also made big bets on some banks, including Standard Chartered.

GIC's loss shows the importance of timing of investments during the financial crisis. Sovereign funds from Singapore, Abu Dhabi, Qatar, Kuwait and China all invested in western banks.

Many investors who went in early, such as GIC in UBS, have lost money. Others who were later have made money - often as they got better terms.

Qatar's sovereign wealth fund made more than US$2 billion on a controversial bet on Britain's Barclays in 2008, for example. Most of its proceeds came from warrants the bank included as part of the deal, plus MCNs that paid out 14 per cent a year.

REUTERS

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