Schweizerische Nationalbank · SIX:SNBN

Schweizerische Nationalbank — Merger or Acquisition (November 2013)

43 slides from Schweizerische Nationalbank's merger presentation, Nov 8, 2013

1. Slide 1: UBS purchases StabFund from the SNB

   Press release Communications P.O. Box, 8022 Zurich Telephone +41 44 631 31 11 communications@snb.ch Zurich, 8 November 2013 UBS purchases StabFund from the SNB Profit of USD 3.762 billion for the SNB On 7 November 2013, UBS signed a purchase agreement to acquire the StabFund from the Swiss National

2. Slide 2: Press release page 2

   Zurich, 8 November 2013 Press release This was done by the SNB and UBS jointly. The Board of Directors of the StabFund consisted of three members from the SNB and two from UBS; the Chairman was always an SNB representative. The SNB was in charge of management and established a seven-person team for

3. Slide 3: Winding up the SNB StabFund transaction

   Winding up the SNB StabFund transaction News conference of 8 November 2013 Thomas Jordan Chairman of the SNB Governing Board and President of the StabFund Board of Directors Marcel Zimmermann Head of StabFund unit and General Manager of StabFund

4. Slide 4: Announcement on October 2008

   Announcement on 16 October 2008  Confederation, Swiss Federal Banking Commission (SFBC) and Swiss National Bank take measures to stabilise UBS and strengthen Swiss financial system: − Transfer of max. USD 60 billion in illiquid UBS assets to special purpose vehicle (SPV). − SNB: Secured loan to SPV

5. Slide 5: Wind-up five years later

   Wind-up five years later  On 15 August 2013, the StabFund repays the SNB loan in full.  On 7 November 2013, UBS purchases the StabFund from the SNB.  The SNB receives a purchase price of USD 3.762 billion for the StabFund.  The SNB earns interest of USD 1.6 billion on the loan. 3 08.11.2013 Stab

6. Slide 6: Programme

   Programme − Preparation and set-up phases, main features and challenges of operation (Autumn 2007 to May 2009) − Portfolio management and its results (June 2009 to September 2013) − Conclusion: Purchase by UBS and assessment of transaction (August to November 2013) 4 08.11.2013 StabFund | Thomas Jor

7. Slide 7: Preparation and set-up phases, main features and challenges of operation

   Preparation and set-up phases, main features and challenges of operation Thomas Jordan

8. Slide 8: Why were measures necessary? General conditions deteriorated

   Why were measures necessary? General economic and financial conditions deteriorated sharply ...  Market conditions worsen after Lehman collapse.  High level of uncertainty.  The financial crisis resulting from the situation in the US real estate market spreads to global financial markets.  Capit

9. Slide 9: Why were measures necessary? UBS's situation in October 2008

   Why were measures necessary? ... and UBS’s situation in October 2008 was critical  High exposure to illiquid securitised loans and loans in the US and Europe: − Huge losses suffered due to fall in prices. − High level of uncertainty regarding valuation of such positions.  Confidence in UBS crumbli

10. Slide 10: Exploring and preparing possible measures

    Exploring and preparing possible measures  Autumn 2007: Authorities assess various measures to support systemically important financial institutions.  Spring 2008, after Bear Stearns bailout: The SNB draws up strategy for possible takeover of illiquid UBS assets. − Attention focused primarily on s

11. Slide 11: Intensive phase after Lehman collapse

    Intensive phase after Lehman collapse  Situation at UBS poses a risk to financial stability in Switzerland and globally.  Details of package of measures worked out in close collaboration with UBS.  Working against the clock to prevent impending illiquidity.  Legal assessment of legitimacy (from

12. Slide 12: Main features of package of measures

    Main features of package of measures Objective: Stabilisation of UBS by strengthening its capital base and liquidity, and by reducing its balance sheet risks.  The Confederation subscribes to mandatory convertible notes in the amount of CHF 6 billion to strengthen UBS’s capital base.  UBS’s solven

13. Slide 13: Specifics of package of measures

    Specifics of package of measures Sale of assets to StabFund UBS (USD 38.7 billion for SNB StabFund USD 25.8 billion* cash) SNB Cash Illiquid loan assets 10% financing contribution Equity from UBS (USD 3.9 billion) Mandatory convertible notes 90% loan from SNB, (CHF 6 billion) interest rate = 1M Libo

14. Slide 14: Emergency liquidity assistance provided via StabFund

    Emergency liquidity assistance provided via stabilisation fund (StabFund)  StabFund extends beyond traditional liquidity assistance due to the transfer of risk.  Liquidity aspect takes precedence for following reasons: − Exchange of illiquid assets for liquid assets (cash). − According to the SFBC

15. Slide 15: Further features of StabFund solution

    Further features of StabFund solution  The interest paid on the SNB loan to the StabFund is the one-month Libor plus 250 basis points.  Term of loan is 8 years (extension to 12 years possible).  UBS has option to purchase SPV after full repayment of SNB loan.  Any remaining equity will be divide

16. Slide 16: Objective achieved with announcement

    Objective achieved with announcement: UBS and consequently Swiss financial system stabilised  Reduction in balance sheet risks, liquidity injection and increase in equity combine to stabilise UBS and strengthen confidence.  Threat to Swiss financial system and Swiss economy is averted. 14 08.11.20

17. Slide 17: The hard work begins

    The hard work begins  Implementation of announced measures poses major challenges: − Legal requirements and organisational structure − Selecting and contracting custodian and valuation agents − Pricing and transfer of assets − Refinancing in US dollars − Accounting and risk management − Asset manag

18. Slide 18: Laying the legal foundations

    Laying the legal foundations  Political opposition to the SPV’s originally planned domicile on the Cayman Islands.  Intensive search for Swiss alternative.  In the end: SNB StabFund Limited Partnership for Collective Investment.  Creation of several sub-companies to manage the acquired assets in

19. Slide 19: Organisational structure of StabFund

    Organisational structure of StabFund UBS SNB provides provides 2 members 3 members staff for staff for StabFund appoints General Manager Board of Directors Information Information, proposals to and assignments from BoD Information, proposals Asset StabFund management team Assignments, monitoring man

20. Slide 20: Transfer of assets and setting of prices

    Transfer of assets and setting of prices  Pricing: − External valuation (6 valuation agents, over 5,000 portfolio positions valued as at 30 September 2008). − Transfer of assets and contingent liabilities amounting to USD 38.7 billion; discount of approx. USD 1 billion on valuation in UBS balance s

21. Slide 21: Original parameters and risks acquired

    Original parameters and risks acquired Originally max. USD 60 billion 60 − Assets worth 50 Unutilised USD 38.7 billion portion (USD 21 billion) transferred. 40 − UBS financing contribution is 10% In USD billions UBS financing contribution (USD 3.9 billion) 30 Contingent liabilities (USD 8.8 billion)

22. Slide 22: Composition of portfolio

    Composition of portfolio 40 40 40 6% 13% 35 35 35 12% 28% 30 30 23% 30 14% 25 25 25 In USD billions In USD billions In USD billions 27% 20 20 20 15 15 15 67% 65% 10 10 10 45% 5 5 5 0 0 0 By currency By instrument By category USD EUR GBP Residential Commercial Other SEK JPY Securities Derivatives Loa

23. Slide 23: Refinancing and balance sheet risks

    Refinancing and balance sheet risks  Refinancing the foreign currency loan to the StabFund: − Firstly, by making use of the existing USD swap arrangement with the US Federal Reserve. − Next, by issuing USD Bills via the SNB. − Finally, by financing at the expense of foreign exchange reserves.  Sig

24. Slide 24: Asset management

    Asset management  Define strategy for liquidating assets  Manage complex assets effectively  Create knowledge base 22 08.11.2013 StabFund | Thomas Jordan | © Copyright Swiss National Bank

25. Slide 25: Portfolio management and its results

    Portfolio management and its results Marcel Zimmermann

26. Slide 26: Asset management concept

    Asset management concept Macro variables Cash flow projections and scenarios Intrinsic values Liquidation/ investment Price Asset management guidelines: information, decisions (hold/sell) • Loss limits vs. market situation carry values • Trading limits Risk control 24 08.11.2013 StabFund | Marcel Zi

27. Slide 27: Asset sales and market performance

    Asset sales and market performance up to end-May 2013 1000 85 900 80 800 75 700 70 In USD millions 600 65 Index points 500 60 400 55 300 50 200 45 100 40 0 35 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sale of loans, including real estate (lhs) Sale of securities (lhs) ABX

28. Slide 28: Management of securities positions

    Management of securities positions Bond Ratings Credit pool insurers agencies Management of normal Pay out in Credit ratings loans event of default for bonds Management of non- performing Service providers in securitisation structures StabFund loans Special Trustee & Servicer servicer issuer Allocat

29. Slide 29: Example of a securitisation sale

    Example of a securitisation sale Collateral: Variable-rate US residential mortgages with high loan-to-value ratios; issued in 2006 with AAA rating, currently rated as CCC (S&P). 110 110 Prices in percent of nominal (lines) / In USD millions (bars) 100 100 90 90 80 80 70 70 60 60 54 50 50 40 40 30 30

30. Slide 30: Loan portfolio management

    Loan portfolio management Heterogenous loan Active credit portfolios: management: • Residential mortgage loans in • Loan modifications the US, UK and Spain • Foreclosures • Commercial mortgages in the • Operation and repositioning of US, Japan and the EU properties • Student loan portfolio in the US

31. Slide 31: Two examples of commercial real estate mortgages

    Two examples of commercial real estate mortgages Repositioning – hotel in Wait and see – the Florida Sears/Willis Tower loan • Foreclosure in 2009 and takeover • Assumption of loan at a discount on the • Mould-infested rooms refurbished nominal value • Positive cash flow once again as of 2012 • Loan

32. Slide 32: Loan repayment and cash flow projections

    Loan repayment and cash flow projections 25 20 In USD billions 15 10 5 0 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Actual performance Projection (baseline scenario): Q1 2011 Q1 2012 Q1 2013 30 08.11.2013 StabFund | Marcel Zimmermann | © Copyright Swiss National Bank

33. Slide 33: Pickup in sales activity in 2013

    Pickup in sales activity in 2013 1.6 8 1.4 7 1.2 6 1.0 5 In USD billions In USD billions 0.8 4 0.6 3 0.4 2 0.2 1 0.0 0 7-Jun 21-Jun 5-Jul 19-Jul 2-Aug 16-Aug 30-Aug 13-Sep 27-Sep Benchmark sales Other sales Cumulated benchmark deviation Sales, cumulated (rhs) Weekly totals, as per end-week 31 08.11.

34. Slide 34: Developments in risk and equity

    Developments in risk and equity 35 30 25 20 In USD billions 15 10 5 6.4 6.5 3.9 0 -3.0 -5 Sep-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Sep-13 SNB loan Contingent liabilities Equity (at fair value) Increase in equity: USD 2.6 billion 32 08.11.2013 StabFund | Marcel Zimmermann

35. Slide 35: Final results, broken down by instrument category and asset class

    Final results, broken down by instrument category and asset class Securities and loans Derivatives 20 18 Rest to nominal value 16 14 In USD billions 12 10 8 Contingent liabilities 6 4 Net result 2 0 Derivatives Other Other Residential Commercial Residential Commercial real estate real estate real es

36. Slide 36: Conclusion: Purchase by UBS and assessment of transaction

    Conclusion: Purchase by UBS and assessment of transaction Thomas Jordan

37. Slide 37: Loan performance and developments in overall risk

    Loan performance and developments in overall risk In USD billions Loan Contingent Overall risk liabilities Assets 29.8 8.8 38.7 Equity contribution –3.9 –3.9 Total as at 30 September 2008 25.8 8.8 34.7 Interest on SNB loan 1.6 1.6 Sales1 –15.8 –6.6 –22.4 Repayments –13.4 –0.3 –13.7 Interest received

38. Slide 38: Proceeds from option transaction

    Proceeds from option transaction SNB StabFund SNB StabFund assets liabilities USD 1 billion SNB Cash (USD 3.762 billion) (USD 6.522 Equity 50% USD 2.762 billion billion) (USD 6.523 billion) USD 5.523 billion Assets 50% UBS (USD 2 million)* USD 2.762 billion (USD 2.762 billion) . * Unsold assets with

39. Slide 39: Returns from SNB perspective

    Returns from SNB perspective Compensation for risk of In USD billions 3.762 billion 5 USD 5.2 billion corresponds to: 4 − a yield of 8.0% p.a. on 3 average loan. 2 1.4 billion − a yield of 6.1% p.a. on average risk exposure. 1 0.2 billion 0 250 BP spread From StabFund Libor component equity 37 08.11

40. Slide 40: Wind-up of option transaction

    Wind-up of option transaction Liquidated (Q1 2014) SNB Sale of StabFund UBS GP together with 1a 3 Dividend 2 partnership interests USD 3.760 billion holds (Dec. 2013) 100% 100% 2 LiPro (LP) AG StabFund (GP) AG establishes holds 5,998 holds 2 partnership partnership 1b interests interests purchases 5

41. Slide 41: The end of an arduous journey

    The end of an arduous journey  StabFund company successfully wound up: − Sooner than expected. − No financial loss for the SNB. − No troubled assets returned to UBS.  Factors for success: − Market recovery. − Liquidation of assets not carried out under time pressure. − Assets managed in a discipli

42. Slide 42: Conclusion

    Conclusion  Objective achieved: UBS and Swiss financial system stabilised.  Financial success is not reason enough to endorse government bailout of banks.  SNB liquidity assistance only provided in absolutely exceptional cases.  Prevention of recurrence through ‘too big to fail’ legislation and

43. Slide 43: Thank you for your attention.

    Thank you for your attention. © Copyright Swiss National Bank

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