Thursday, February 21, 2008

Dresdner Rescues $19 Billion SIV, Follows Citigroup

(Bloomberg) -- Dresdner Bank AG, Germany's third- largest bank, agreed to rescue its $18.8 billion K2 structured investment vehicle, joining Citigroup Inc. and HSBC Holdings Plc in putting capital at risk to bail out investment funds crippled by the collapse of the subprime mortgage market.

Dresdner, a unit of Munich-based Allianz SE, will provide a credit line to enable K2 repay all of its senior debt, the bank said in an e-mailed statement today. Dresdner will cut the size of the fund, which has been reduced from $31.2 billion since July, according to the statement.

The bank is the last of the world's biggest financial institutions to salvage debt funds from the seven-month freeze in credit markets. Banks including Citigroup, HSBC, Bank of Montreal and WestLB AG have disclosed plans to support their SIVs with $140 billion of assets.

``This is a potential threat to Dresdner Bank,'' said Thilo Mueller, managing director of MB Fund Advisory in Frankfurt. ``There is little liquidity for some of these assets and with comparative assets continuing to fall, you need to book further writedowns.''

SIVs, which use short-term borrowing to buy higher-yielding assets, have shrunk by $100 billion from $400 billion since August, according to Moody's Investors Service.

Smaller Size

``We have been restructuring the SIV for a few months now and aim to further lower the size,'' spokesman Ulrich Porwollik in Frankfurt said in a telephone interview. ``The liquidity line is part of the restructuring process.''

The rescue should have no ``significant impact'' on Dresdner's capital base, the statement said. The bank, Germany's third largest by assets, doesn't plan to add the SIV's holdings to its books, Porwollik said.

K2 has no ``direct exposure'' to securities backed by subprime or midprime assets or collateralized debt obligations based on asset-backed notes, the statement said.

One of the SIV's three portfolios has entered a ``restricted operating period,'' a rule designed to protect senior investors that prevents it making payments to lower-ranking bondholders. The credit line from Dresdner may enable K2 to end the restriction, K2 said in a separate statement today.

``Such an outcome, however, cannot be assured,'' the statement said. K2 didn't disclose the size of the portfolio.

Subprime Writedowns

Allianz said today fourth-quarter profit fell 52 percent to 665 million euros ($979.6 million) on subprime-related writedowns and trading losses at its banking division. That missed the 729 million-euro median estimate of 12 analysts surveyed by Bloomberg.

Allianz's banking division, which mostly consists of Dresdner, had an operating profit of 730 million euros last year, down from 1.4 billion euros in 2006, after more than 1.3 billion euros in writedowns on structured products.

The bank bailouts avert the risk of forced sales of assets by SIVs. Concern that such fire sales would further roil credit markets prompted U.S. Treasury Secretary Henry Paulson to begin talks on setting up an $80 billion rescue fund last year. New York-based Citigroup and JPMorgan Chase & Co. and Bank of America Corp. in Charlotte, North Carolina, abandoned the so-called SuperSIV after banks began rescuing their own funds, led by London-based HSBC.

More than $20 billion of SIVs have defaulted after being forced to start winding down, including funds set up by New York- based Ceres Capital Partners LLC and Cheyne Capital Management (UK) LLP in London.

Whistlejacket Capital Ltd., set up by Standard Chartered, may default today after the company's receiver, Deloitte & Touche LLP, froze debts last week. The London-based bank abandoned a rescue plan for the SIV yesterday.

Gordian Knot

Three SIVs or similar companies have not yet been bailed out or restructured. Cortland Capital Ltd., set up by Paris-based Natixis and Ontario Teachers' Pension Plan in Toronto, and Abacas Investments Ltd., managed by NSM Capital Management in Greenwich, Connecticut, are not affected by the crisis, Standard & Poor's said last month.

Sigma Finance Corp., a so-called limited purpose finance company with more than $34 billion of public debt and run by Gordian Knot Ltd., has a negative ratings outlook from Standard & Poor's. Sigma faces ``very similar pressures as SIVs given the current dual problems of falling asset values and a drying up of short-term funding,'' S&P said last month.

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