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Trade-Exchange Rates International
DBS to inject emergency funds into CDO instrument
Tuesday, August 28, 2007
HONG KONG: DBS, Singapore’s largest bank, said Monday that it would provide emergency liquidity for an asset-backed financial instrument worth 1.4 billion Singapore dollars after investors withdrew support due to volatile credit markets, making it the latest Asian bank to declare unexpected exposure to the U.S. subprime mortgage crisis.
DBS said in a statement that it had not previously defined its obligations to the instrument, named Red Orchid Secured Assets, or Rosa, as directly exposed to collateralized debt obligations because it believed it would be financed by investors.
Rosa needed the financial lifeline because of turmoil in credit markets caused by fallout from U.S. subprime mortgage defaults, DBS said. Rosa, an off-balance sheet structure called a conduit, held 1.1 billion dollars, or $720,000, of CDOs, which are bundles of bonds and loans.
"I don’t think DBS will be the only one who’s missed something the first time," Deborah Schuler, senior vice president at Moody’s Investors Service, said Tuesday.
Banks’ use of special-purpose vehicles like Rosa is under increasing scrutiny following reports that Barclays and State Street may be facing losses from units they set up that bought CDOs. Subprime fallout has roiled global markets as investors dumped riskier assets and lenders tightened credit.
"We initially did not include Rosa as part of DBS’s own exposure to CDOs on the assumption that Rosa would continue to be funded by investors," the bank said. "Following the market volatility in recent weeks, some asset-backed commercial paper conduits, including Rosa, have had to draw on liquidity facilities provided by banks."
DBS was the biggest contributor to the decline in the benchmark Straits Times index. The bank’s shares closed 2.9 percent lower Tuesday at $19.80.
"It is not so much about how much of the CDOs that the banks have, but the quality," said Teng Ngiek Lian, a fund manager at Target Asset Management in Singapore. "That is what is difficult to ascertain at this point."
Most of the CDO assets in Rosa are rated AAA and DBS said it does not expect these to default.
Almost half of all CDOs sold in the United States in 2006 contained subprime debt, according to a March report by Moody’s Investors Service. Lenders selling the asset-backed debt typically offer guarantees from banks, which promise more money when it is needed.
"It’s the more internationally active banks that have done this," David Marshall, managing director of Fitch Ratings in Hong Kong, said Tuesday. "The size of this structure is very small relative to DBS’s assets. We would not expect it will have any difficulty in raising funding for this vehicle."
Rosa has total assets of 1.4 billion dollars, which can be backed by funds provided by DBS, the bank said. DBS has $128.6 billion of assets, data compiled by Bloomberg show.
Of DBS’s CDOs, the amount with "some exposure" to the U.S. subprime market remains unchanged at $188 million of investments, or 12 percent of its holdings of the securities, the bank said.
"DBS has one of the strongest capital positions of banks operating in Asia, and we have minimal exposure to the U.S. subprime market," said Jeanette Wong, the chief financial officer.
More disclosures from Asian financial institutions about holdings of CDOs may surface as the banks look again at their books amid growing investor concerns about liquidity, Schuler, of Moody’s, said by phone from Singapore.
Still, Asian financial institutions are not likely to own a lot of securities tied to U.S. subprime mortgages, she said.
Rams Home Loans Group in Australia said it would try to sell more mortgage-backed bonds in the domestic market after failing to refinance 6.18 billion Australian dollars of short-term debt in the United States this month, Bloomberg News reported from Melbourne.
The Sydney-based company plans to increase its funding from residential mortgage-backed securities in Australia to 4.07 billion dollars, or about $3.4 billion, from 3.8 billion dollars as of June 30, it said in a statement.
No Australian lender has sold mortgage-backed securities in the local market since July 27, underscoring the difficulties faced by nonbank home-loan firms in financing their businesses amid the current credit crisis. Rams shares have slumped 57 percent since the company’s ill-timed listing a month ago, making it an increasingly attractive takeover target.
"Banks have looked at it before, so you would think at half the price they would look at it more closely," said David Goode, a credit analyst at Challenger Financial Services in Melbourne.
Rams shares fell 9 cents, or 7.8 percent, to 1.07 dollars in Sydney, compared with the 2.50 dollars investors paid before its listing in July.