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Rhinebridge Plc (IKB) - SIV (with sub-prime MBS exposure)

2007-11-12

Count of distinct funds: 1
Capital base: EUR 2.3 billion
Loss: ?

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stories: forbes.com, wsj.com, bloomberg.com

This EUR $2.3 billion (at peak) conduit/SIV fund parented by IKB Deutsche Industriebank AG was put into receivership on or about October 23, 2007, which qualifies it for "implosion" in our book.

The first article, from October 18, points out that the fund had breached a major covenant:

Rhinebridge suffered a ``mandatory acceleration event'' after IKB's asset management arm determined the SIV may be unable to pay back debt coming due, the Dublin-based fund said in a Regulatory News Service release. Rhinebridge had $1.2 billion in commercial paper outstanding as of Oct. 5, according to Fitch Ratings.

...

Rhinebridge said Oct. 12 that it breached a ``major capital loss test'' because its net assets fell to less than half the amount it owes holders of its subordinated capital notes after repaying senior debt. The company had five business days to remedy the breach before the enforcement event took place.

Even before that, the IKB fund was distressed:

In August, Rhinebridge had to sell $176 million of its assets to cover obligations, and as much $320 billion of holdings by SIVs worldwide may be dumped if the market doesn't improve.

Rhinebridge was then put into receivership about a week later. A few days later, the receiver (Deloitte) stated that the fund's assets would not be sold off "fire-sale style"; though it isn't clear how much delaying a sale will actually help. Maybe they're waiting for professor Paulson's fantastic M-LEC to save the day?

Interestingly, Rhinebridge was formed only in April of this year, and this press release sings the praises of SIV-based structured finance at the time. It all seems so quaint now:

The impending launch of Rhinebridge and the expectation of more SIVs to hit the market is a result of the current spread environment combined with the vehicles' structure, according to Douglas Long, evp business strategy for Principia Partners. "From the SIV manager's point of view, because it's a leveraged business they are better positioned to take advantage of tight spreads than someone who doesn't have leverage and has to utilise capital."

He continues: "Obviously, it is harder getting returns than in a wider spread environment, but the SIV model allows you to outperform other investments if you have the appetite, experience and can source the right assets. At the same time, in a tight environment it's generally easier to find capital investors because a SIV is a proven conservative structure but, again, the leverage provides good returns relative to other products."

These factors, coupled with the fact that the market has more recently begun moving to three-tier capital structures, means that there is also a broader pool of investors who are now investing in SIVs. Although the barriers to entry are still high, launching such a vehicle is an increasingly attractive proposition.

To which we can only reply: where do we sign up?!

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Important: This fund is on our list of hedge funds that have "imploded" (see also ailing lenders). However, please note that "imploded" is a somewhat subjective. The "imploded" list contains hedge funds (or other unregulated and autonomous speculative investment funds) which have gone through some sort of permanent adverse change. This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid mark-downs in net asset value; or abnormal "bail-out" by corporate parents or peers in order to avoid write-downs and provide liquidity. The funds are of any type and sector.