UBS Readies For Infusion Of Bond Funds

Swiss bank UBS AG confirmed that it will get a loan of two billion Swiss francs ($1.81 billion) from the covered-bond bank of Swiss mortgage institutions, in a deal facilitated by the Swiss National Bank.

The covered-bond bank, or Pfandbriefbank, will sell a privately placed covered bond to three Swiss retail banks: Zürcher Kantonalbank, Postfinance and the Raiffeisen group of banks. The medium-term loan will be backed by Swiss prime mortgages, a UBS spokeswoman said.

The Pfandbriefbank is one of only two institutions with the right to issue covered bonds in Switzerland. It is owned by roughly 200 Swiss banks whose Swiss mortgages account for at least 60% of their balance sheets.

The government and members from the central bank have in recent months leaned on retail banks to continue providing liquidity to the country's major international banks, such as UBS. The transaction, which UBS expects to be finalized before Wednesday, was first reported in Swiss weekly Sonntagsblick.

The three retail banks have attracted huge inflows of client assets this year as those customers have moved their deposits to state-backed institutions like them. This has presented the retail banks with an unusual problem: Because the interbank lending market has almost dried up, they face a shortage of investment opportunities in which to park excessive funds at attractive terms.

UBS, by contrast, saw big outflows of client funds and was faced with the reluctance of Swiss retail banks to provide short-term lending. "The transaction shows that mid- to long-term borrowing is still possible in the Swiss financial market, and it allows UBS to refinance itself at attractive market terms,"a Swiss National Bank spokesman said.

UBS shares fell 4.3% to 13.50 Swiss francs in Zurich on Monday. The lender, among the banks hit hardest by the global credit crisis, continues to see its clients withdraw money because of concern over write-downs. It is trying to slim down its investment-banking arm and said Monday that J.P. Morgan Chase & Co. was buying UBS's Canadian energy and global agricultural arms. Terms of the deal, set to close in the first quarter, weren't disclosed.

UBS also said it is in talks with other parties to sell other commodities activities. The bank entered the commodities business long after Wall Street rivals, only to seek a quick exit once it became mired in losses on illiquid securities last year. UBS now will only run a precious-metals and exchange-traded commodities arm.

Separately, UBS said Monday that it had produced and sold funds containing products from disgraced asset manager Bernard Madoff, but that the funds weren't on a list of recommendations made to clients.

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UBS Readies For Infusion Of Bond Funds