The toll of companies caught up in the subprime mortgage mess continues with two more German financial institutions hit late last week and the huge French-owned Axa insurance group, which operates here, revealing a $1.2 billion bailout of two bond funds.
Apart from Bear Stearns, the fifth biggest investment bank on Wall Street, Axa’s is the biggest name ensnared by the crisis so far.
News reports late last week say Axa Investment Managers stepped in to bail out a $US1 billion US bond fund it runs after it sustained large losses two weeks ago, despite the fund not owning any of the subprime securities which have been downgraded by major rating agencies.
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The Axa IM U.S. Libor Plus Strategy, which is 100% invested in asset backed securities, saw its two sub-funds lose 13.45% and 12.6% of their value between July 18 and 19 when credit markets around the world sharply corrected.
Axa revealed the unusual step of offering to buy out any investor in the fund who wanted to sell. Axa made the offer because it feared liquidating the funds’ assets in a volatile market, which could have driven values even lower, racking up bigger and bigger losses.
In Germany the Union Investment Asset Management Holding AG, the country’s third-largest mutual fund manager, has stopped redemptions from a fund after clients withdrew $US137 million in the past month.
The ABS-Invest Fund, sold to institutional investors across Europe, has about 6% of its assets in securities related to subprime mortgage loans.
And the German Pharmacist and Doctor’s Bank said it had up to $US158 million of subprime exposure. Much of that was in AAA-rated investments with six months to maturity, and another tranche in a collateralized debt (CDO) transaction that was partly exposed to the subprime market, the bank said in a statement.
The two disclosures followed the disclosure late last week that banks backing the rescue of the Ruhr-based industrial bank, IKB, expect it to lose up to 20% of its $US24 billion subprime investment.
The revelation of the scale of the problem at IKB has reportedly staggered German banks and regulators.
The rescue fund financed mainly by the bank’s 38% owner, a Government finance agency, is valued at around $A5 billion.
On Friday, state prosecutors in Duesseldorf, where IKB is based, said that they were keeping a close eye on the bank.
IKB, which was founded 80 years ago to handle German industry’s post-war reparations and now lends to small- and mid-sized companies, has become Europe’s biggest casualty so far of the U.S. subprime crisis.
The struggling Bear Stearns investment bank has sacked its Co-President, Warren Spector, in an attempt to convince the market that it is in control in the wake of losing billions of dollars in the subprime crisis.
Bear Stearns was not only the second largest underwriter of credit market securities that helped fund the subprime mess, the collapse of two of its hedge funds precipitated the latest round of the crisis, and the suspension of a third last week triggered a step up in fear of further problems by US investors and markets around the world.
The bank’s board advanced a meeting a day to a few hours ago to sack Spector and appoint a sole President, Alan Schwartz.
Spector was responsible for all the bank’s fixed interest and credit market securities operations.
Bear Stearns shares have shed a third of their value since May and by sacking Spector, its board is trying to tell markets it is in charge.
But US brokers say that by sacking the man in charge the board is really saying that it didn’t know what was going on, which is scary.
Standard and Poor’s rating agency Friday put Bear Stearns on creditwatch negative, which if followed by a downgrade, would cut its rating to a single A and cost it millions of dollars in higher interest costs and fees.
The Bank’s Chief Financial Officer Sam Molinari hit investor confidence when he said in a conference call discussing the S&P move ‘I’ve been out here for 22 years, and this is as bad as I’ve seen it in the fixed-income markets .”He compared the crisis to 1998, when hedge fund Long-Term Capital Management collapsed and Russia defaulted on its debt. Bear Stearns did not participate in the LTCM bailout.
Investment banks abandoned attempts Friday to sell to investors $US1 billion for the leveraged buyout of Alliance Boots, the British pharmacy chain. There were no takers at all, according to UK media reports.
American Home Mortgage Investment Corp. collapsed on Friday: its shares had fallen from $US10 to 70 US cents after it became the second-biggest residential lender to fail this year.
Investment banks cut off credit earlier last week, in the wake of an announcement from the company that it was halting all cash outflows for dividends and payments on convertible bonds.
The company had around $US20 billion in loans still on its books. It did $US60 billion of loans in 2006. The size of the loss is not known but is expected to exceed $US1 billion.
Jeffrey Larson, founder of collapsed hedge fund Sorwood Capital Management, last week apologised to investors in an emotional conference call during which revealed around $US1.2 billion would be distributed back to investors and a large proportion of $US90 million in fees for the year to June 30, would also be handed back. Sorwood lost an estimated $US1.5 billion in backing subprime mortgage securities and in redemptions to investors. The fund did not have enough cash to get it through the slump and meet payments to investors.
This is unlike Bear Stearns which turned off a third hedge fund in trouble last week (and it has two earlier funds with losses that could total $US2 billion).
Citadel Investments, a Chicago-based hedge fund stepped in last week to take over the credit portfolio of Sorwood.
Cerberus Capital Management has been forced to help finance its $USS7.5 billion purchase of Chrysler itself because of the shut down in credit markets.
Cerberus announced on Friday that it had reached agreement with Daimler Chrysler to jointly take on $US2 billion in debt to help finance the deal.
DaimlerChrysler will take on $US1.5 billion of that debt, while Cerberus is taking on the remaining $500m.
DaimlerChrysler said its “financing support is a strong sign of its overall determination to make sure that, under the majority ownership of Cerberus; Chrysler has a good start as a successful stand-alone car company”. DaimlerChrysler is keeping a 19.9%.
This is in effect a mixture of vendor finance from Daimler which showed how desperate it was to sell by financing 75% of the transaction, as well as keeping that shareholding (which was part of the original deal).
Cerberus had to complete the deal otherwise it would have lost credibility in the markets and among some of its investors.
And in the most worrying development, Wells Fargo and Wachovia Corp have been named as two of a group of lenders limiting mortgages to some of their more creditworthy borrowers because of the rising level of mortgage defaults.
Wells Fargo is the second-largest US mortgage lender: it says it is cutting back the sale of so-called Alt-A home loans through brokers, while Wachovia has stopped these loans entirely.
US lenders are also making fewer home loans once thought to be safe because investors now perceive those loans to be risky.
Alt-A loans, short for Alternative-A, fall between prime and subprime in quality. American Home Mortgage was an Alt-A lender.
The Wells Fargo is notable because of the bank’s conservative lending standards. It didn’t make many of the risky loans but hasn’t escaped suspicion.
It also operates in California where mortgage defaults are the highest, followed by Nevada, another western state.
Finally, according to the Barings investment bank, some 46 financing deals representing $US60 billion have been pulled from the markets since June 22 because of the rising turmoil and loss of confidence.
Barings said no deals were pulled in all of 2006.
Barings estimated investment and other banks that have already committed financing for such deals holding an estimated $US400 billion on their balance sheets.
It expects the paralysis in the corporate debt market will continue into the northern autumn.
The problems flow from the structured credit market, where collaterallised credit obligations and loan obligations, were a major source of financing and refinancing deals. Both are now dead, which could worsen the problem. The banks have no way of refinancing these deals from wider distribution of new securities.