UBS on Monday announced that it would buy the commodity index business of AIG, the struggling US insurer, after it spent the past two months divesting non-core commodities activities.
The Swiss banking group said it would pay $15m to AIG Financial Products for the business, including rights to the popular DJ-AIG commodity index. The index is one of the two leading commodity indices of its kind, after the S&P GSCI, and is popular among passive investors, such as pension funds, who bet on rising commodity prices.
Although the initial sum is modest, UBS said it could make additional payments of up to $135m on the purchase over the following 18 months, based on future profits of the activities being acquired.
Commodity investments linked to the DJ-AIG index amount to about $10bn-$20bn, according to industry estimates and bankers on Monday said that AIG was a counterparty for a “significant amount” of that sum.
The reputation of the index suffered last year after AIG’s financial problems became clear.
ETF Securities, the London-based issuer of popular commodity exchange traded funds, ran into problems last year after several market-makers of its funds stopped trading them amid concerns about AIG, which was ETF’s counterparty for about $2bn in some of its DJ-AIG commodity products. The issues were later resolved.
UBS’s purchase of the AIG business would likely alleviate some concerns about the DJ-AIG index and commodities investments in which AIG was a counterparty, bankers said.
AIG’s commodity index business is composed of a platform of commodity index swap products and funded notes based on the benchmark DJ-AIG commodity Index. UBS said the acquired products were highly complementary to its own UBS-Bloomberg Constant Maturity commodity indices.
The purchase comes just after last week’s sale by UBS of its remaining energy, power and metals trading activities to Barclays Capital and the disposal in December to JP Morgan of its Canadian energy business, as well as its London-based global agricultural commodities trading activities.
However, UBS said at the time that it would retain all its precious metals trading activities, where the bank is a powerhouse, as well as its substantial interests in trading commodity indices, which are being expanded by Monday’s deal.
The purchase involves AIG’s trading book and its information technology platform, but no staff, although some individuals may choose to move to UBS at a later stage. The deal is expected to close by May.
Bankers familiar with UBS’ commodities operations said that its commodity index unit was the most profitable of the whole business.