DRESDNER Kleinwort’s $18bn structured investment vehicle, K2 Corp, came under more pressure this week as Moody’s put its senior notes on review for downgrade, following a similar action from Standard & Poor’s last month.
Dresdner Kleinwort said in February that it is bailing out K2 with an unspecified support facility and this week it reiterated its support.
"This announcement by Moody’s does not affect the intended offer of support announced by Dresdner Bank on Feb 21," said Dresdner. "The bank remains thoroughly committed to the course of action proposed."
Moody’s said that the market value of K2’s portfolio fell from 100.1% on July 27, 2007, to 96.1% on March 6, 2008. This caused the net asset value of capital to fall to 68%.
The agency said that a further 2% fall in the portfolio market value would put the vehicle into enforcement. However, given that the unprecedented spread widening in SIV portfolios has so far only resulted in a 4% fall in K2’s portfolio market value, it appears that it should avoid enforcement unless markets take another steep plunge. Like many SIVs, K2 has an enforcement trigger when the NAV of capital falls below 50%.
"The rating action is prompted by a combination of the funding difficulties the vehicle has experienced in the last few months and the decline in prices," said Henry Tabe, managing director at Moody’s in London. The agency put the Aaa rated MTNs and Prime-1 rated CP of the vehicle on review for downgrade.
"These aren’t new problems, but at some stage when faced with deteriorating market conditions, ratings are bound to come under pressure."
Standard Chartered, which sponsored a SIV called Whistlejacket Capital, withdrew its plans to bail out the vehicle last month after Whistlejacket went into enforcement, following a breach of the 50% NAV trigger. StanChart lost control of the vehicle when it failed the NAV test. The security trustee took over and appointed Deloitte as a receiver.
StanChart said its withdrawal from any bailout plans was, among other things, due to "the impracticality of completing any proposal within the confines of the receivership as it has evolved".
Despite the fact that enforcement triggers have already cost one SIV bailout, Tabe says that working quickly on a restructuring, rather than attempting to remove the triggers, is the wisest option.
"Eliminating enforcement triggers in this market environment is not an easy proposition," said Tabe. "Some period of consultation with the trustee and investors may be required and that could last several months.
