BlackRock, the US asset manager, will pay UBS $15bn for a portfolio of subprime mortgage debt in a deal that the Swiss bank plans to announce on Tuesday with its first-quarter results, people familiar with the transaction said, FT reported.
The debt - which is being bought by BlackRock at a 25 per cent discount to its face value of $20bn - will be placed in a new fund and marketed to investors, the people familiar said. UBS will hold a minority interest in the fund, which will enable it to partcipiate in any potential upside.
UBS declined to comment. UBS has said it expects to announce a loss of about SFr12bn ($11.3bn) for the first quarter. So far, it has taken total writedowns of $38bn, mostly for mortgage assets.
To fill that hole, it has raised SFr13bn from investors including the Government of Singapore Investment Corporation and members of the the Saudi royal family. It also has announced a SFr15bn rights offer.
BlackRock's move represents one of the more signficant examples of a growing number of contrarian bets by leading financial firms that say that the worst is over in the credit markets.
Goldman Sachs, private equity firms including TPG and several hedge funds have all been buying mortgage assets - in some cases reversing bets of last year.
Some financial firms also have invested in mortgage servicing groups, which collect mortgage payment, so they can gain more expertise in evaluating loan pools and mortgage securities.
For example, Goldman Sachs, bought Litton Loan Servicing in December to help it find distressed mortgages to buy and restructure.
In recent weeks, leading banks also have taken advantage of the rally in the credit markets to reduce their portfolio of buyout financings, but the progress in getting rid of mortgage exposures has been slower.
"The upside of this rally is that people have been selling a lot of risk," says the head of debt capital markets at one major Wall Street firm. "Everyone is covering their short positions."
BlackRock, which is 49.8 per cent owned by Merrill Lynch, currently manages about $1,360bn in assets.
The deal with UBS comes after BlackRock agreed in March to manage $29bn in mostly mortgage-related securities held on Bear Stearns' balance sheet as part of JPMorgan Chase's emergency purchase of Bear.
Under the terms of that deal, the US Federal Reserve lent $29bn to Bear in return for the securities and hired BlackRock to manage the portfolio. The US Treasury will receive any gains from sales of the assets. JPMorgan also lent Bear $1bn as part of the deal and would take the first losses up to that amount on the sale of the assets.
Some members of Congress criticised the BlackRock deal, saying others should have been able to bid for the job of managing the assets.