Friday, February 22, 2008

Dresdner questions future of SIVs

(FT) Dresdner Bank on Thursday hammered another nail in the coffin for structured investment vehicles when it provided a potential $19bn rescue facility for K2, its SIV, and questioned the future of the specialised funding vehicles that banks have used to keep assets off their balance sheets.

SIVs were set up to raise cheap funding in the so-called commercial paper market and invest the proceeds in high-yielding credit assets. However, the freeze in the commercial paper market has left SIVs struggling to refinance.

Dresdner, which is Germany’s third-largest bank and belongs to the Allianz insurance group, said it was offering a support facility to K2 to help the SIV repay all its senior debt due in stages from the middle of this year.

The move should prevent K2 from becoming a forced seller of its assets, although the plan is that Dresdner will eventually wind down the portfolio. Dresdner said K2’s assets had been reduced from $31.2bn to $18.8bn since July.

Dresdner’s move is the latest evidence that the prospect of a meaningful recovery in commercial paper remains distant. K2 stood out among SIVs in not having been downgraded by ratings agencies.

Helmut Perlet, Allianz’s chief financial officer, said he did not expect K2’s assets to come on to Dresdner’s balance sheet and did not anticipate the bail-out to lead to losses. K2’s assets were entirely investment grade and contained no exposure to the type of subprime or mortgage-backed structured credit assets which have caused widespread losses across the banking sector.

“The refinancing of these vehicles gets harder by the day. The appetite from investors is not overwhelming,” he said.

Banks have no contractual obligation to support the SIVs that they have set up and manage, but they face reputational risks in letting them fail. In November, HSBC became the first major bank to pledge support to its SIVs, which had a value of more than $45bn. Citigroup in December offered to support its seven SIVs, worth $49bn, having previously insisted it would not do so.

Dresdner also said it was scaling back its investment banking activities, including withdrawing from the SIV business, with the loss of 450 jobs. About two-thirds of the cuts have already been made.

Dresdner Kleinwort, Dresdner’s investment banking arm, will concentrate on cash management services for corporations and infrastructure financing. However, it is not thought to be planning to add to headcount in those areas.

“The question is what is the right fit and size of [the] investment bank. We are cutting a few product lines that don’t fit. This is the most burning issue for us at the moment,” Mr Perlet said.

However, Michael Diekmann, Dresdner’s chief executive, said he did not wish to get into a “strategic discussion” about the future of investment banking within Allianz.

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