11 January 2008
Capital improvement program
10 January 2008
We are writing to you with more information about the measures we are proposing
to strengthen our capital position, and the in-formation you should expect to
receive in the next few weeks.
Reasons for the capital improvement program
In our third quarter results announcement on 30 October 2007, which you can find
on our website (www.ubs.com/investors), we provided you with information
regarding our various exposures related to US residential sub-prime mortgages.
At that time we also warned that given the nature of our exposure to these
securi-ties, we would face additional writedowns in the event of a fur-ther
deterioration in the US housing and mortgage markets.
Throughout October, November and into December, the mar-kets for US residential
sub-prime mortgages and related securi-ties, and the US residential housing
market in general, continued to deteriorate, and this led to increasing
speculation about the potential for additional value impairment of our
In view of these adverse market developments, it became in-creasingly evident
that substantial additional writedowns would be required. We then knew that we
faced the risk that the sheer size of these numbers, the resulting reduction in
our capital ratios and any remaining uncertainty about the ultimate value of our
positions could lead to an increased unease for clients and other stakeholders.
On 10 December 2007 we issued further earnings guidance for fourth quarter 2007
in the light of further substantial write-downs of our US sub-prime mortgage
backed securities holdings. At the same time we announced a comprehensive
capital im-provement program. You can find a link to this announcement at
www.ubs.com/investors. The decisions on the capital improve-ment program were
based on a number of considerations we set out below.
The best indicator of our capital strength is the BIS Tier 1 capi-tal ratio,
which compares a regulatory definition of our equity capital with our
risk-weighted assets using a formula set by the Bank for International
Settlements. UBS normally maintains one of the highest Tier 1 ratios in the
international banking sector.
The drop in our Tier 1 ratio resulting from the expected sub-stantial overall
loss in fourth quarter could have led to down-grades by rating agencies of our
top-tier financial ratings. This could have had a dual effect. It could, on the
one hand, add to client concerns about our financial strength and, on the other
hand, weaken our funding position and increase our borrowing costs in the
international financial markets.
A second, strategic, consideration is that the value of UBS de-pends crucially
on the continued strength of our client businesses. During 2008, the environment
for financial markets, especially in the US, is uncertain, and we need to manage
through this period from a position of financial strength.
For these reasons, we concluded that we needed to strengthen our capital
In addition, a strong capital position will allow us to grow our business in the
future - and this, executed prudently, is a funda-mental source of value
creation for shareholders.
At the same time, a decision to let our Tier 1 ratio drop to low levels, and
rebuild the capital base through future earnings, would have substantially
increased the risk and volatility of your share-holding in UBS. We judged that
an immediate capital increase was the best course of action.
We also concluded that such a strengthening of the capital base would have the
desired effect only if we could communicate to our stakeholders that new capital
is unconditionally committed to UBS. Moreover, we felt it would be a valuable
demonstration of confidence to bring in highly reputable, stable, long-term
finan-cial investors. We believe that the Government of Singapore In-vestment
Corporation - GIC - as lead investor meets these criteria completely.
We considered undertaking a rights issue, but rejected this on the grounds of
cost, complication and time. Such a fund raising exercise has a number of legal
requirements that would have tak-en time to fulfil, and during that period new
capital would not have been irrevocably committed. In current market conditions,
this would in our judgement have allowed too many uncertainties to remain, put
UBS's reputation at risk, and left the share price exposed to speculation.
You will have seen that some of our competitors have taken analogous measures.
This shows that these measures are in line with contemporary market practice. We
are confident that our prompt introduction of these measures means we have
secured fresh capital from the best possible sources.
We cannot, at this time, accurately predict the future develop-ment of US
residential mortgage markets and therefore the ulti-mate impact on our positions
in sub-prime mortgage related se-curities. However, we are confident that, after
the proposed capital improvement, our capital position would remain strong even
if conditions in the US housing market were to continue to deteriorate to levels
below those that are currently anticipated.
Certainty with respect to the financial soundness of UBS is criti-cal to protect
our client business and to secure continued low-cost funding in international
capital markets. These two elements are essential for the value of your firm and
we therefore strongly be-lieve that our actions are in the best interest of our
Details of the capital improvement program
Mandatory Convertible Notes
UBS intends to issue mandatory convertible notes (MCN) in the amount of CHF 13
billion to two long-term financial investors. The Government of Singapore
Investment Corporation Pte. Ltd. (GIC)
Current management policy
UBS has a history of creating increased profits, strong growth and greater
shareholder value by focusing globally on three business-es - wealth management,
asset management and investment banking - and by making sure these businesses
operate as one integrated whole. We continue to believe that this strategy is
ap-propriate for the financial industry for many years to come.
The past year has seen a sudden and unprecedented collapse in an important
securities market, with implications for world credit markets. UBS, in common
with many other firms, suffered significant losses as a result. UBS is
addressing the issues - both personnel and systems - exposed by these market
events, and the appropriate lessons have been drawn. UBS will become a stronger
firm as a result of these changes.
Although we can take measures to strengthen UBS, we cannot control the
environment in which we operate. Our geographical di-versity is an advantage, as
are our very strong fee earning businesses in wealth management, asset
management and investment bank-ing. Nevertheless, it is important to recognize
that the problems that the financial industry faces have not evaporated with the
turn of the year, and that 2008 is likely to be another generally difficult
Our responsibility is to maximize the value of UBS by making sure it is in a
position to navigate the current turbulent markets and to grow its profits in
the medium and long term. We believe that the capital improvement program is a
fundamental part of this process.
We will write to you again at the end of the month with a de-tailed agenda and a
Shareholder Information Brochure for the EGM, which will be held at the St.
Jakobshalle in Basel, Switzer-land, on 27 February 2008 at 10 a.m.
Marcel Ospel Marcel Rohner
Chairman Chief Executive Officer
Cautionary statement regarding forward-looking statements
This letter contains statements that constitute 'forward-looking statements',
including, but not limited to, statements relating to the consummation of the
measures to increase capital described in this letter; the sufficiency of these
measures as compared to anticipated market developments; the effect of these
measures on client confidence; the impact of the proposed measures on your
interest in UBS; and our intentions with respect to future returns of capital.
While these forward-looking statements represent our judgments and future
expectations concerning the development of our business, a number of risks,
uncertainties and other important factors could cause actual developments and
results to differ materially from our expecta-tions. These factors include, but
are not limited to, (1) the extent and nature of future developments in the
subprime market, (2)occurrence of other market and macro-economic trends,
whether as a result of subprime market developments or due to other
unanticipated market trends, (3)impact of such future developments on positions
held by UBS and on our short-term and longer-term earnings; (4)successful
consummation of the sale of the mandatory convertible notes, the stock dividend
and the sale of the treasury shares discussed above; (5) our ability to utilize
the additional capital to develop our customer businesses; and (6) the impact of
all these matters on the timing and amount of future returns of capital. In
addition, these results could depend on other factors that we have previously
indicated could adversely affect our business and financial performance which
are contained in other parts of this document and in our past and future filings
and reports, including those filed with the SEC. More detailed information about
those factors is set forth elsewhere in this document and in documents furnished
by UBS and filings made by UBS with the SEC, including UBS's Annual Report on
Form 20-F for the year ended 31 December 2006. UBS is not under any obligation
to (and expressly disclaims any such obligation to) update or alter its
forward-looking statements whether as a result of new information, future
events, or otherwise.
The issuer may file a registration statement (including a prospectus) with the
SEC for any offering pursuant to the stock dividend discussed above. Before you
invest in any such securities, you should read the prospectus in that
registration statement and other documents the issuer has filed with the SEC for
more complete information about the issuer and such offering. You may get these
documents, once filed, for free by visiting EDGAR on the SEC Web site at
www.sec.gov. Alternatively, the company will arrange to send you the prospectus
after filing if you request it by calling toll-free +1-866-541 9689 (US Transfer
Agent, Mellon Investor Services) or Shareholder Services in Switzerland at
+41-44-235 62 02. Our investor relations department would be happy to address
any questions you may have. You may reach them at +41-44-235 41 00 or +1-212-882
This letter is not an offering of any securities that may be described above.
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