Having endured the brunt of the subprime crisis, UBS is consolidating departments and concentrating on its strengths. Joint global head of investment banking Rick Leaman talks to Kathryn Tully.

The massive $37bn of write-downs that UBS has taken to date as a result of its exposure to the US residential mortgage market has forced a radical overhaul of its investment banking division since this time last year. The bank cut a total of 1513 staff from the investment bank in the six months up until the end of March, many of those being mortgage-backed securities (MBS) and collateralised debt obligations (CDO) under­writers, structurers and traders.

It has closed its US principal finance business and further reduced its mortgage exposure in May by selling risky mortgage securities, primarily subprime and Alt-A US residential MBSs, with a nominal value of $22bn, for $15bn to a new distressed asset fund that will be managed by BlackRock.

Since the third quarter of last year, UBS says its positions related to the US subprime market have been reduced by about 60%, either through disposals or write-downs. A separate fixed-income, currencies and commodities (FICC) work out group is now managing the bank’s remaining positions in businesses that it wants to exit.

But the bank argues that overhaul has not just been organised to minimise US MBS and CDO losses; it has been about maximising the potential of the other parts of the investment bank. If Jerker Johansson, who was appointed chairman and CEO of the investment bank in March, is in charge of overseeing this drive, then Rick Leaman and fellow co-head of global investment banking, Alex Wilmot-Sitwell, are also charged with fulfilling that aim.

A single division

The general strategy is to capitalise on the bank’s strengths in equities and investment banking and to refocus its troubled FICC business on core areas. One of the results is that it closed its institutional municipal securities underwriting and structuring business at the beginning of June, although the municipal securities trading business will be transferred to the wealth management division. It also consolidated global syndicated loans, its investment grade and high-yield businesses and asset-based lending operations into a single credit division.

Another key initiative, in January, was to combine its equity and debt capital markets businesses into a single capital markets division. Efforts have been made to marry the two together before, but this is the first time the two businesses have been brought together within the same structure. Messrs ­Leaman and Wilmot-Sitwell are also overseeing that combination.

“We are combining our capital markets origination and structuring effort into a single group,” says Mr Leaman. “It’s about having a better dialogue with clients about all areas of their capital structure and maximising the opportunities. We’ve just started the process.” He expects to start seeing results immediately, but says it should make a positive contribution to the bottom line in the long term.

Turning the blighted FICC division around is certainly a high priority. In the first quarter, the bank posted a loss of CHF19.1bn ($18.7bn) just from fixed income, currencies and commodities alone, the result of more write-downs of residential mortgage-backed securities (RMBS) and RMBS CDOs at the bank, as well as other asset-backed positions, in particular US student loans, and some of the protection the bank bought from monoline insurers.

Trading results in FICC have also been weak, but Mr Leaman points out that there have been some bright spots. The rates business did well, driven by government bond trading and European swaps and options. And the repositioning of the business on core areas seems to be bearing fruit, most notably in debt capital markets origination.

Brighter outlook

“Investment-grade bonds have been up substantially this year,” he says, and adds that the bank has gained a number of key mandates in that area.

The bank was joint bookrunner on Kraft Food’s €2.8bn acquisition financing of Danone, joint bookrunner in the $4.4bn financing for the demerger of Dr Pepper Snapple Group from Cadbury Schweppes, and lead manager on a RMB6.5bn ($952m) multi-tranche issue for Shenzhen Development Bank, China’s second largest sub-debt deal. In fact, UBS’s market share of primary investment-grade bond issues in the first quarter was 4.6%, up from 4.2% for full year 2007.

In fact, the high volume of deal activity across the investment bank gives Mr Leaman reason to think that the outlook is brighter than during previous downturns.

Mr Leaman was joint head of global mergers and acquisitions along with Jimmy Neissa before he became global co-head of investment banking in 2005, and despite the fall-off in overall merger and acquisition activity so far this year with the dearth of leveraged deals, he says there has been plenty of business in advising strategic buyers and sellers. In the first quarter of this year, UBS advised globally on 78 transactions with a deal volume of $85.6bn.

Of the standout deals this year, it was joint financial advisor to International Paper on its $6bn purchase of Weyerhaeuser’s packaging business; it is adviser to BHP on its proposed A$151.2bn ($146.6bn) combination with Rio Tinto and is exclusive financial adviser to China Telecom on the $15.8bn acquisition of the CDMA business and network of China Unicom.

Mr Leaman cannot see the leveraged business rebounding for a while, but says that other parts of the business are both busier and more lucrative than before. “Investment-grade acquisition bridge loans are a good business for us right now,” he says. “We are working on a few large-cap buy-side transactions at the moment that present an attractive risk/return for us.”

Wealth management

And despite a significant drop in deal volumes compared with last year, UBS has chalked up some significant mandates in equities underwriting and kept a respectable 5.9% market share of global primary equity products. It was adviser and joint bookrunner on the $19.7bn initial public offering (IPO) for Visa in March (the largest in US history), and joint bookrunner on the largest Indian IPO, Reliance Power, for $2.9bn in January. It is also one of the global co-ordinators on Deutsche Bahn’s planned IPO.

Some commentators have speculated that UBS might spin off its lucrative wealth management operation, which still managed to achieve net earnings of CHF5.6bn in the first quarter, but at the moment, Mr Leaman says that the focus is on exploiting business opportunities from the private client base within the investment bank.

In fact, in February, vice-chairman Walter Hulse took on a new role as head of the business development group, which basically treats Wealth Management Americas and Global Asset Management Americas as clients and works to bring about cross-selling business.

“There are so many opportunities coming from the wealth management division and now we are capturing them,” says Mr Leaman. “We have restructured our coverage model for wealth and asset management under Walt Hulse. The early returns have been great.”

The bank has certainly not been shy in addressing its problems head-on. In April, UBS published a report about the firm’s positions and losses in the US subprime residential mortgage sector up until the end of 2007, including how the losses developed in the now closed Dillon Read Capital Management, the investment bank’s rates business and its asset-backed securities trading portfolio, and the causes of the losses. It has set up a risk committee, chaired by David Sidwell, who will now sit on the board of directors.

UBS has also been praised for proactive moves to strengthen its balance sheet since the beginning of the year, which Mr Leaman says has been a big bonus when talking to clients. On June 13, it successfully completed the CHF15.97bn rights offering, which was approved by shareholders back in April, with the issue of 760,295,181 new shares. Back in February, shareholders approved the issue of CHF13bn of mandatory convertible notes and the bank has also issued €1bn of perpetual preferred securities.

Taking these into account, the bank says that its pro-forma Tier 1 ratio at end of March was 11.8%, among the highest in the industry.

“We have really got our credit base in order,” says Mr Leaman. “In fact, we think we now have one of the strongest capital structures on the street.”

Losses persist

Nevertheless, UBS is certainly not out of the woods yet. The bank as a whole reported a loss of CHF11.5bn for the first quarter of 2008, following a loss of CHF18.2bn from the investment bank and the loss of CHF19.1bn just from FICC alone.

There will also be more redundancies. In a letter to shareholders at the time that the first-quarter results were published, the chairman pointed out that by mid-2009, the bank would employ about 5500 fewer people than it did in May 2008, with 2600 job losses in the investment bank likely by the end of 2008, mostly from redundancies.

Mr Leaman himself has had a long career at the bank. He has been in his current role since October 2005, but has actually worked at UBS since 1997, and prior to that, at Dillon Read, since 1992. What appeals to him about the UBS franchise so much? “The culture’s continually evolving,” he says. “It’s a young firm, so we are all participating in the growth of the business, and in a relatively short amount of time we’ve had some great successes.”

He points out that he likes this evolution and being in a position to grow, which means he is not fazed by the prospect of challenging times ahead.

“We’re going to stay out in front of clients and we are going to grow our share in the business,” he says. “This is when we can demonstrate our long-term commitment to our clients.”

CAREER HISTORY

2005: Appointed joint global head of investment banking at UBS;

2004: Joint head of global mergers and acquisitions; chairman of the business review group for the Americas;

1997: Joined UBS as co-head of M&A;

1995: Promoted to co-head of healthcare at Dillon Read & Co;

1992: Joined Dillon Read & Co;

1986: Began career at Smith Barney, Harris Upham & Co;

1986: MBA from the Fuqua School of Business;

1984: BA from Duke University.

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