Lone Star to buy KfW’s stake in troubled IKB

KfW, the German government-owned development bank, is selling all its holdings in German lending bank IKB, which amount to 90.8% of IKB’s total shares. Neither party officially disclosed details on the size of the transaction, but it is believed to be a few hundred million euros.

“KfW was able to achieve an adequate, positive purchase price and to reach an agreement on sharing certain portfolio and legal risks with Lone Star,” said Wolfgang Kroh, chief executive of KfW in Frankfurt.

IKB had depended on short-term asset-backed commercial paper for funding and ran into problems in June and July 2007 when liquidity in the money markets dried up. It also held assets that faced large writedowns, such as US mortgage-backed securitised products. KfW bailed out the troubled bank in July last year, which included putting together a strategy to rescue IKB in association with German banking associations and the country’s central bank.

The rescue had cost KfW €7.2 billion as of the start of 2008, and the bank expects to report additional charges of up to 10% of this figure when the transaction completes.

The deal involves KfW assuming a smaller share of IKB’s on-balance sheet portfolio than originally planned and Lone Star providing IKB with additional equity. The private equity firm will provide funding for IKB without placing any further burdens on KfW. The goal is for IKB to continue to operate as a financer for small and medium-sized companies.

“Through the sale of our shares, IKB’s role as a small to medium sized enterprise bank will be maintained, giving the bank a long-term perspective – something it would not have had with KfW,” added Kroh.

The sale still needs to be approved by German and European regulators, and the deal is expected to close by October 2008.

Although KfW has expressed optimism about the deal, it might not necessarily result in an instant turnaround in IKB’s results. On August 21, rating agency Moody’s affirmed IKB’s bank financial strength rating as E, the lowest level, and placed its Baa3 long-term debt and deposit ratings on review for possible downgrade. Moody’s highlighted concerns relating to the bank's lending business, which has (in the agency’s view) been eroding during the financial crisis, and its weak and vulnerable financial profile – including problems the bank might still have to face with regard to high-risk assets on its balance sheet.

“We remain concerned that the refinancing required for the bank's lending business, which we understand will remain the core of IKB's franchise, will be significantly more difficult to secure from debt capital markets in the foreseeable future and at a much higher expense,” wrote Katharina Barten, Frankfurt-based senior analyst at Moody’s.

Rating agency Standard & Poor’s expects the German banking sector to improve over the second half of this year. It says writedowns resulting from market turbulence accounted for much of the decline in earnings in the first half of 2008, and those writedowns should decrease in the second half of the year.

"Nonetheless, while performance for the sector is likely to improve in the second half of the year, it will still fall short of our initial expectations, and overall earnings will remain weak," said Standard & Poor's credit analyst Stefan Best in Frankfurt.

Dresdner Bank has also faced recent difficulties. It reported its third consecutive quarterly pre-tax loss for the second quarter of 2008, including losses of €1.3 billion in its investment banking division over the first half of the year. Commerzbank is rumoured to be attempting a takeover of Dresdner, and official details of this are expected to be revealed in the coming weeks.

See also: KfW board changed in wake of IKB woes
German banks take on $520 million in IKB losses

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