Dresdner's bail-out of K2 adds to worries over SIVs

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The Independent Online

Dresdner Bank has been forced to step in and rescue its $18.8bn (£9.6bn) structured investment vehicle K2 – just the latest nail in the coffin of the ailing SIV industry.

The German group, which is owned by Allianz, has offered the K2 board a support facility, just months after rivals HSBC and Citi-group also stepped in to salvage their structured investment vehicles (SIVs).

The move is designed to prevent the value of K2's assets falling low enough to trigger a cut-price fire sale.

In a signal that Dresdner intends to wind K2 down should it accept the offer, Allianz's chief financial officer Helmut Perlet said: "The bank's assessment is that the SIV model has no future and it has successfully been moving out of this business."

Moody's rating agency said at the end of last year that it expects SIVs to die out in their current form.

Dresdner said it would pay back all the senior debt in the SIV, believed to make up about 90 per cent of the vehicle. The bank said: "The support for K2 is expected to have no significant impact on the capital base of Dresdner Bank Group."

K2's board is yet to reply to Dresdner's offer, which was made yesterday, but the bank is confident it will accept the offer.

Mr Perlet added: "K2's financing is assured until May but we thought it made sense to do the restructuring now."

The value of the SIV's portfolio has been reduced from $31.2bn in July, when it was the third largest in Europe, to $18.8bn.

Dresdner was quick to stress the quality of its portfolio, saying all the assets were investment grade, with no exposure to sub-prime mortgages or collateralised debt obligations.

SIVs are a complex way of issuing short-term debt to invest in longer-term, higher-yielding assets such as mortgage-backed securities. They came to prominence with the onset of the credit crunch, as the value of the longer-term assets spiralled with the onset of the US sub-prime mortgage crisis last year.

Standard Chartered walked away from plans to bail out Whistlejacket, its $7.15bn SIV, this week. Whistlejacket fell into receivership last week after the value of the fund's assets plunged.

HSBC brought $35bn on to its balance sheet when it bailed out its two SIVs, Cullinan Finance and Asscher Finance, in November.

The following month Citi-group announced it was to rescue its seven SIVs, which brought $49bn worth of assets on to the balance sheet.