UBS revealed a $10 billion writedown and an emergency injection of funds from Singapore and the Middle East, making it the biggest victim of the U.S. subprime crisis to date among major European banks.
Singapore is taking 9 percent of UBS in a deal that mirrors actions taken by U.S.-based Citigroup . Citi expects to write off between $8 billion and $11 billion and has secured funding from the Abu Dhabi Investment Authority.
"There must be a suspicion that it (UBS) feels a strong capital base is necessary just in case there is need for further write-downs," said Helvea analyst Peter Thorne.
The writedown comes after a 4.2 billion Swiss franc ($3.7 billion) hit that UBS suffered at the end of October, and which was also related to U.S. subprime mortgages -- loans made to high-risk and low-income homebuyers who were later caught out by rising interest rates and are now defaulting on payments.
UBS said it expects a fourth quarter loss, which may even drag it into loss for 2007 as a whole.
The Swiss bank, Europe's fourth largest, also replaced plans for a cash dividend with a stock dividend, and said it would examine its investment bank thoroughly and weed out low-profit divisions.
UBS's shares initially fell almost 3 percent as investors took fright at the anticipated dilution of their share of earnings. They later recovered on relief that the worst of UBS's subprime woes could be over, and were trading 2.9 percent higher at 58.90 Swiss francs.
The Singapore investment gives the Southeast Asian island-state 9 percent stake of UBS through its Government of Singapore Investment Corporation (GIC), another injection into a top western bank by a sovereign wealth fund along the lines of the Abu Dhabi Investment Authority's purchase of a $7.5 billion stake in Citigroup.
"It's a developing trend. Asian and Middle Eastern sovereign investors are cash rich and have a longer time horizon than the average market investor," said Omar Fall, analyst at ABN AMRO.
A further stake of about 1.5 percent goes to an unnamed Middle East investor, and the two investments raise 13 billion Swiss franc ($11.5 billion) of fresh capital. Oman's State General Reserve Fund denied suggestions that it was the investor in question.
Many in the market said the 9 percent coupon should not be a surprise.
"It is what the market is currently willing to take in terms of investing in these companies. In the current environment, doing better than that is a bit difficult," Mamoun Tazi, from MF Global, told "Squawk Box Europe."
Tazi said the UBS writedown will prompt markets to take a closer look to other stocks in the financial sector.
"We will be looking at most of the banks that have CDOs exposure to do similar things, but we don't expect the same size of writedowns," Tazi said.
UBS said it had not ruled out granting board seats to the new investors.
The announcement comes on the eve of an investor day in London on Tuesday at which UBS Chief Executive Marcel Rohner and other top managers are due to address analysts and investors.
Investment Bank Challenge
UBS Chairman Marcel Ospel, who said he was under no pressure from within the bank to resign, said UBS now faced a challenge refocusing its investment bank, which has taken the full force of the subprime meltdown.
The bank also said it would approve the resale of 36.4 million treasury shares previously intended for cancellation, increasing Tier 1 capital by about 2 billion francs.
UBS is to replace the 2007 cash dividend with a bonus stock issue which would boost Tier 1 capital by 4.4 billion francs.
Together with the capital increase, Tier 1 capital would be raised by a total of 19.4 billion francs, boosting its Tier 1 capital ratio to 12 percent.
The latest writedowns mainly involved UBS's holdings of risky "super senior debt" and of collateralized debt obligations (CDOs), said UBS. The writedowns were based on the values of the exposures at the end of November.
Only last month UBS's Chief Financial Officer Marco Suter advised analysts and investors in meetings that the bank did not expect to make any huge writedowns in the fourth quarter.
"He (Suter) did say there would not be $8-9 billion of writedowns. He was publicly saying things that have not happened," said Alan Webborn, an analyst at SG Securities.
The two new investors will subscribe to an issue of mandatory convertible notes carrying a coupon of 9 percent until conversion into ordinary shares, which must take place within approximately two years of the issue.
Keeping a high Tier 1 capital ratio is key to securing UBS's franchise as the world's largest wealth manager and retaining the business of its very richest clients, which include many dollar billionaires, say analysts.
UBS has been the hardest hit among Europe's major banks. CEO Peter Wuffli left the bank in July and was replaced by Rohner.
The bank has since replaced nearly all of its top managers.
Some economists said UBS may be just the first of a series of banks in Europe that would confess to more losses.
"Generally speaking, I think the banking sector is going to have more writedowns in the months ahead so I wouldn't touch the banking sector, at least in the Western world," Puru Saxena, a CEO of Puru Saxena Limited, told "Worldwide Exchange."
-- CNBC.com contributed to this report