The Wall Street Journal- online, 25.08.2007
Sachsen Seeks Buyer Amid Credit Crunch
By David Crawford in Dresden, Germany, and Carrick Mollenkamp, Paris
Sachsen LB, the second German bank to become embroiled in the credit-liquidity crunch, is in talks to sell itself to another German bank amid a souring investment in a London hedge fund also hurt by the fallout, according to people familiar with the situation.
The proposed sale of Sachsen to Landesbank Baden-Württemberg reflects how quickly the lack of short-term money has swept through the global financial system in the past month, forcing banks to take dramatic steps to cover failed investments, debt or the cash shortfalls of clients.
In recent days, the main victims have been bank or hedge-fund affiliates that used commercial paper to cover maturing debt and buy higher-returning assets such as securities underpinned by U.S. mortgage loans. Amid fears of mounting losses from subprime lending, investors have been reluctant to buy the paper, however.
Sachsen's move to find a buyer underscores how some banks got in over their heads in trying to generate returns from complicated credit investments. The Leipzig bank operates a number of affiliates that have struggled to sell commercial paper.
Sachsen has an estimated €200 million (1 million) stake in London fund Synapse Investment Management LLP that has received margin calls from British bank Barclays PLC and faced a seizure of collateral. Barclays discussed with Sachsen the idea of Sachsen providing money to Synapse to protect Sachsen's own investment. But it appears that Sachsen will be sold, according to people familiar with the situation. Officials of Synapse weren't available for comment.
Sachsen said its affiliate Ormond Quay Funding PLC was facing difficulties selling commercial paper, leaving in question who would cover the cost of €17 billion that Ormond Quay has outstanding in IOUs. German bank regulators and banks stepped in to provide financial help in the form of a credit line totaling €17 billion.
Troubles emerged this past week when another affiliate, Sachsen Funding I Ltd., said it was having financial difficulties amid the lack of demand by asset-backed commercial-paper investors and might have to be restructured. On Thursday, Sachsen Funding, which is registered in Dublin, said, "Liquidity in the credit markets has deteriorated significantly."
More debt is coming due, prompting Sachsen to engage in talks with Landesbank Baden-Württemberg. A Sachsen spokesman declined to comment.
Auditors from Landesbank Baden-Württemberg and Norddeutsche Landesbank Girozentrale recently visited Dublin to inspect the books of Sachsen LB and its affiliates, according to a person familiar with the situation. The audit was one of the conditions for the €17-billion line of credit. The second condition was that Sachsen LB quickly find an external partner or buyer.
The talks with Landesbank Baden-Württemberg, a Stuttgart firm, could still fall apart. On Sunday, Sachsen LB's owners -- Saxon's finance ministry and Saxon savings banks -- are scheduled to meet.
In late July, IKB Deutsche Industriebank AG also required a financial bailout after an affiliate was unable to sell commercial paper. IKB's predicament sparked fears that more banks would be in the same predicament.
Documents in Germany provide new details of Sachsen's appetite for financial risk. A 2005 report by German financial watchdog Bafin raised questions about how Sachsen and its affiliates managed off-balance-sheet assets. The Bafin analysis cited inadequate controls needed to monitor risk.
The notes issued by Sachsen Funding along with those of three other structured investment vehicles, known as SIV-lites, were downgraded or put on negative credit watch by Standard & Poor's on Tuesday. Notes issued by Sachsen Funding and Cairn High Grade Funding I were put on negative watch while Mainsail II and Golden Key Ltd. notes were downgraded. These structures, like bank affiliates such as Ormond Quay, sell commercial paper to fund the purchase of assets, typically U.S. mortgage loans.
Ratings-agency documents show that Barclays PLC helped set up or agreed to provide liquidity lines to all four. Barclays isn't a liquidity provider to Sachsen Funding, according to these documents and people familiar with the situation.
In a statement on Tuesday, Mainsail II, which managed billion in assets, said Barclays hadn't funded a credit line because the SIV, which is managed by London hedge fund Solent Capital Partners LLP, failed to meet conditions required for a drawdown of a facility. "The attempt by Solent and Barclays Capital to restructure the vehicle ended by late afternoon" on Aug. 20, Solent said in an Aug. 21 news release.
Separately, people familiar with the situation said two SIV-lite clients were able to draw on available credit that is backed by collateral.
Write to David Crawford at david.crawford@wsj.com and Carrick Mollenkamp at carrick.mollenkamp@wsj.com
