Do SWFs [Heart] Subprime? The UBS Caper

♠ Posted by Emmanuel in at 6/02/2008 01:16:00 AM
This post is a follow-up to a post I made earlier about "SWFs Not Seeking (Ineligible) Wall Street Firms." Although various sovereign wealth funds more or less proved to be the funders of last resort to these subprime-laden banks towards the end of 2007, SWFs have been remarkably silent in 2008 on the equity stakes front. As stock prices of these banks have fallen markedly since the late 2007 round of official purchases, foreign buyers have stayed away in droves so far this year. You could say that they are waiting for the subprime detritus to work its way out of the financial system before taking another plunge. Once bitten, twice shy.

Recently, however, the Financial Times notes that SWFs may be on the prowl for, of all things, distressed mortgage securities offloaded by the likes of UBS. In particular, half of the funding for investment firm BlackRock's deal to buy $15B in UBS mortgage securities is said to have come from SWFs. Interesting? It certainly is so. Although it may fuel optimists' notion that the mortgage mess is nearly "bottoming out," the market timing of SWFs has not exactly been exemplary as of late:

Sovereign wealth funds have provided more than half the equity for the BlackRock fund that bought $15bn of troubled mortgage debt from UBS this month, people with knowledge of the matter say.

The BlackRock deal highlights the rapidly evolving strategies of the sovereign wealth funds, which initially sought to take advantage of the turmoil in global markets by investing directly in beleaguered financial institutions. However, these rescue financing deals led to fears of losses by the funds – and a political backlash in the West. This has led sovereign wealth funds to look for lower-profile opportunities, often by investing through private equity funds.

The BlackRock deal marks one of the first big forays into mortgage debt by the sovereign wealth funds, providing ammunition for analysts who argue that the mortgage market is recovering. BlackRock raised $3.75bn in equity for the fund that bought the UBS mortgage debt. The rest of the money was borrowed from UBS itself, UBS has said.

Some of the more sophisticated sovereign wealth funds, such as Kuwait Investment Authority, have been looking at acquiring real estate assets in the US, either directly or indirectly. KIA also has acquired stakes in real estate investment trusts, which are trading at bargain levels.

BlackRock has long-standing ties with Middle Eastern and east Asian sovereign wealth funds such as Government of Singapore Investment Corporation. Next week, BlackRock’s founder, Larry Fink, is taking his board on a swing through the Middle East with a stop in Kuwait, the KIA said in a press release.