Troubled Irish financial company is allowed to restructure
DUBLIN: An Irish court has appointed an examiner to oversee the restructuring of a small financial company that owes $238 million to some of the worlds largest investment banks.
With the ruling, issued late Wednesday, the company, Structured Credit, became the latest to be enveloped by a crisis in subprime lending that has spread in the global credit market.
Justice Mary Finlay Geoghegan ruled that at least a part of Structured Credit had a reasonable chance to survive if it could raise $125 million from shareholders. She approved Structured Credits request to restructure rather than liquidate.
The court also heard details of the amounts that Structured Credit owed the 12 banks. One bank, Morgan Stanley, which favored liquidation, said Structured Credit owed it $93.7 million.
The company ran headlong into the crisis when customer demands for collateral climbed to $438 million in mid-August from $5 million in late June. The demands led the company on Aug. 20 to seek court protection from a creditor, Nomura Bank Holdings, which said it was owed $28 million.
With 10 employees and offices overlooking one of the finest 18th-century private squares in central Dublin, Structured Credit worked in a segment of the derivatives market called credit risk transfer. The company raised $207.8 million in early 2006, enough to give it entry into the worlds $34.5 trillion derivatives markets.
The company underwrote derivatives that were intended to offset risk, providing protection for its investment bank customers against losses beyond certain agreed amounts. Since June 2006, it had signed 48 agreements to pay its 12 customers - which included Bank of America, Bear Stearns, Citibank, Deutsche Bank, HSBC, Merrill Lynch and UBS - collateral, in cash, if the derivative contracts it underwrote fell below certain amounts.
Market specialists said that Structured Credit, because of its size, was probably ill-prepared when the crisis hit the derivatives market.
“I am surprised that such a small firm is operating in that space,” said Andrew Dillon, managing director of Baronsmead Partners Ireland, a seller of professional indemnity insurance to bankers. “Its usually only the biggest that are involved,”
Structured Credit, led by Edward Bowers, raised $207.8 million from investors including the private equity fund Aquiline Financial Services in New York; the California Public Employees Retirement System; the Canadian pension fund Caisse de Dйpфt et Placement du Quйbec; the Calyon unit of Crйdit Agricole; and the American mortgage insurer Triad Guaranty.
According to company records, Bowers set up Structured Credit in 2006 after working for the mortgage insurer Radian Group. The chairman of Structured Credit, Geoffrey Kalish, was a senior principal at the companys largest shareholder, Aquiline.
In March, Structured Credit said as a “testament” to its “potential importance to the Irish economy” the minister for finance, Brian Cowen, had attended the opening of its offices on Fitzwilliam Square. In its first year, the company underwrote $5 billion of derivative credit risk agreements with 12 banks.
But the seeds of what Structured Credit described in court documents as an “unanticipated” crisis were set during a few weeks in July and August. In court Wednesday, reports by an independent auditor, Ernst Young, showed that during those weeks, Structured Credit posted collateral of $175 million to 10 investment banks.
