The Union Bank of Singapore

The Singapore Investment fund (GIC) was reported to have invested 11 bn CHf in convertible notes in UBS. The terms of the deal are as follows:

a. Convertible note with 9% interest payment
b. Maturity period of 2 years
c. Upon maturity, if stock price lower or equal to 51.50 Chf, convert @ price = 51.50, Approx 213.6 million shares, equating a 10% stake
d. Upon maturity, if stock price higher or equal to 73.60 Chf, convert @ price = 73.60, Approx 149.5 million share, equating a 7% stake
e. If upon maturity, price is between 51.5 and 73.6, strike will equal price

Kinda like buying a call option strike at 73.6 + selling a put option strike at 51.5 with maturity 2 years.

What it means,

1. Great positive publicity for sovereign funds - providing a much needed source of liquidity and shedding the 'barbarians at the gate' image
2. Positive signalling effect for investors with investment horizon greater than 2 years for financial stocks
3. Dilution effect for existing shareholders - looks like some investors will not be pleased, expect to see some defensive moves from the board and the chief executive

Going forward,

Expect more capital injections to the investment banks as the credit turmoil continues with the liquidity coming from the Middle East, China and countries with huge foreign reserves.
A further depreciation of the US dollar if these sovereign funds liqiudate their holdings in US treasuries to fund their investments (if investments are to be paid in currencies other than USD)