Credit where it’s due

The newspapers these days must put the toughest of Wall Street traders off their morning cereal.

But even as the news just seems to get worse and worse, some outfits are seemingly sticking up two fingers right back up at the markets.

Ireland has become renowned for being a soft regulatory touch for the listing of debt instrument issuances, and it shows. There are over 90 firms registered in the country with ‘CDO’ (Collaterised Debt Obligation) in the title. Firms from Lehman Brothers– with its Saphir vehicle, to Deutsche Bank with its upbeat-named Jazz CDO, have settled 3,000 miles from the US financial hub, and called Dublin home.

But there have been major structural cracks appearing, the first seen in Dublin-registered SIVs (Structured Investment Vehicles) Cheyne Finance, and subsequently Rhinebridge.

A $2bn SIV, Rhinebridge was sponsored by German bank IKB.

In mid-October it defaulted on its debts to the owners of Rhinebridge’s commercial paper. A receiver, Deloitte, was appointed to Rhinebridge to try and sort out the mess.

“Rhinebridge ran into difficulty due to the recent events in the credit markets resulting in it being unable to fund its short term debt repayments while at the same time the market value of the assets have deteriorated,” said Deloitte a few weeks ago.

It was the second time an Ireland-based SIV had got into trouble. During the summer, Cheyne Finance also stopped paying its short-term debt and Deloitte was also appointed receiver. Royal Bank of Scotland then secured exclusive talks to refinance the $6.6bn fund, but the period of exclusivity expired last week. A deal is still expected to be concluded, however.

But CDOs – an Irish favourite - are even riskier than SIVs, because they’re more expensive to finance. SIVs are open-ended investment structures that can be continually refinanced (even if it isn’t that easy these days), while CDOs are closed-end, with set maturity dates. Merge the two, and you get SIV-lites.

Confused? Good, that’s the way for the banks like to have everyone.

The Saphir vehicles established here by Lehman have already drawn fire from Australia.

Sydney-headquartered Grange Securities, which was acquired by Lehman Brothers in January this year, began selling CDOs called Mahogany Notes through a company called Mahogany Capital, to Australian local councils and other investors in 2004, and again in 2006, according to the Sydney Morning Herald.

The Mahogany Notes were invested in Saphir Notes, which are in turn products from Lehman Brothers, manufactured by its Dublin-based Saphir Public Finance company.

Both the Mahogany issuances are now well underwater and that’s caused some upset.

And as if banks were not getting into enough trouble with the residential mortgages in the US, there’s the prospect of what might happen with so-called commercial-backed mortgage securities (CBMS), with musings over recent weeks that this could be the next of level of subsidence to hit markets.

Just recently though, despite all the turmoil, a new CBMS vehicle was registered in Dublin. Pan European Hotels CBMS, the formation of which was administered through the Channel Island’s office of Allied Irish Banks, is bent on issuing CDOs despite the current turmoil.

It could be someone thinking big, or someone thinking small and one swallow, as they say, doesn’t make a summer – the fact they’re thinking about it at all is a bold move.

Seems like there may be some life left in the debt markets after all.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2726873.ece

http://www.risk.net/public/showPage.html?page=328506

http://www.deloitte.com/dtt/press_release/0,1014,sid%253D2833%2526cid%253D176787,00.html

http://www.ft.com/cms/s/0/6e6e2f26-7ceb-11dc-aee2-0000779fd2ac.html

http://www.arandomwalk.com/2007/08/30/aib-cheyne/

http://ftalphaville.ft.com/blog/2007/08/29/6895/the-cheyne-finance-wind-up-letter/

http://www.iht.com/articles/2007/11/05/business/hedge.php?WT.mc_id=rssbusiness

http://ragingbull.quote.com/mboard/boards.cgi?board=CLB01194&read=114340

http://www.grangesecurities.com.au/dynamicpages.aspx?cid=1&navid=1

http://www.smh.com.au/news/business/asic-protects-cdo-investors-names/2007/11/04/1194117879435.html