German bank's Dublin arm posts loss of $668m

A DUBLIN-BASED investment vehicle owned by German state bank WestLB has posted a loss of $668 million (€473 million) in 2008 after suffering further unrealised losses on investments.

Details of the loss are contained in accounts just filed for Kestrel Funding, which is based in the International Financial Services Centre (IFSC) in Dublin, for the year ended December 31st, 2007.

The company suffered a pretax loss of $402 million in 2007 after posting realised losses of $48 million on financial instruments and unrealised losses of $336 million in the instruments.

The firm’s auditors KPMG said that severe liquidity difficulties, rising funding costs and the decline in the value of its financial instruments “casts significant doubt about the company’s ability to continue as a going concern”.

In a note to the 2007 accounts, which were signed off by the company two weeks ago, Kestrel blamed its more recent losses on the dislocation in the world’s credit markets which continued through 2008 and 2009.

“The securities comprising the company’s investment portfolio continued to be thinly traded with significant price volatility,” the company said. “Due to the illiquid nature of these markets, the company may find it difficult to sell securities.” As a result, the company booked the net loss of $668 million for 2008 over unrealised investment losses. The company had financial instruments valued at $2.7 billion at the end of 2007.

WestLB, a regional bank in Germany, is owned by local authorities in North Rhine-Westphalia and savings bank associations in the same region.

The Dusseldorf-based bank has agreed to halve its asset base, sell subsidiaries and pull out of risky ventures as a condition of a €5 billion bailout from its owners to insure against potential losses on €23 billion in toxic investments.

The bank has used its operations in Dublin to move some of the €23 billion in problem loans and toxic assets off its books.

Kestrel was established in 2006 with the objective of generating “stable returns” for investors in its income notes by investing in a portfolio of “investment-grade debt securities”, according to the firm.

Kestrel’s accounts state that during 2008 WestLB transferred its holdings of the Irish company’s senior debt and income notes to another IFSC-based company called Phoenix Light SF.

The German bank also agreed to provide further liquidity to Kestrel; this arrangement expired last February. Kestrel entered into an agreement with Phoenix at the end of 2008 which allows it to sell Phoenix’s pool of assets in a restructuring arrangement that enables Kestrel to repay its debts.

Last April, Phoenix sought to accelerate this arrangement whereby all of Kestrel’s assets will be sold on to Phoenix by June. According to its accounts, Kestrel says it has agreed with the request from Phoenix.