The Australian arm of Swiss investment bank UBS AG has amassed a 2 per cent stake in National Australia Bank following the completion of a hybrid conversion program on Monday.
UBS was appointed last month as the nominated purchaser of a A$1.34 billion capital notes issue made by NAB in March 2015.
While noteholders, including retail investors, yesterday received the face value of their investments plus accrued interest, UBS was required to convert 7.5 million notes to equity at $21.34 per share.
Following another bloodbath on the ASX on Monday NAB scrip closed at a 24-year low of $13.88.
This means that UBS has acquired its $750 million equity exposure at a 35 per cent premium to the prevailing market price and is sitting on paper losses of more than $260 million.
A NAB spokesperson told Banking Day that another 5.92 million notes issued under the program were yesterday "redeemed in the hands of the nominated purchaser".
UBS agreed to underwrite the resale facility in the middle of February when Covid-19 threat had not permeated the Australian market and NAB's share price was surging above $27.
Given the negative impact of Covid-19 on asset values and economic activity, it could be a long time before UBS gets a return on its fresh interest in NAB.
The big question that a few analysts were mulling on last night was whether UBS had hedged this exposure before NAB's share price was crunched in the last three weeks.
If it did hedge the exposure against a sharp fall in NAB's share price, an overseas or local institution may have crystallised a big loss on the arrangement yesterday afternoon.
Neither UBS or their hedging counterparty should bank on an interim dividend to soften the pain of holding so much NAB stock.
In a bleak update on its operations, NAB appeared to indicate that it would be challenged to deliver a first half dividend.
"Should the impact of the virus be severe or prolonged, it is expected to have a material adverse impact on the global and Australian economies, which in turn may have a material adverse impact on NAB's financial performance and position," the bank told the ASX.
"The broader economic impact of the pandemic is expected to impact on asset quality, leading to increased provisions and risk weights over time."
NAB has an option to raise more CET 1 capital in December by converting an issue of $1.72 billion convertible preference shares.