05/27/2011

WestLB Shops What’s Left of US Business

WestLB has put its U.S. structured-product operation on the block.

The marketing effort got under way last week and already has garnered a few tentative offers, though it’s not entirely clear how much of WestLB’s U.S. business remains intact. Prior to the credit crisis, the bank was known in the States for its commercial-paper conduits and an asset-management unit called Brightwater Capital that managed collateralized debt obligations and structured investment vehicles. But those businesses have since been shuttered or radically downsized.

The expectation is that the sale will draw keen interest from large hedge funds and investment banks that want a crack at the WestLB vehicles’ remaining inventories of structured products, including asset-backed securities, mortgage bonds and CDOs. Wells Fargo appears to be among the big banks that have expressed early interest.

“Everybody from Lone Star to BlackRock is going to take a crack at that portfolio,” one market player said. “And I can guarantee nobody is going to pay what WestLB wants for it. They’re going to be offering pennies on the dollar for the stuff.”

A pullback by WestLB has looked increasingly likely since last November, when the European Commission ordered the Dusseldorf, Germany, bank to pare assets, sell peripheral businesses and return to its original mission as a central bank for state-owned depository institutions in Germany. The restructuring was tied to large subsidies WestLB received from the German government in the wake of the credit-market crash.

At its peak in 2007, WestLB’s U.S. structured-product business included two conduits, Compass Funding and Paradigm Funding, with a combined $19.7 billion of paper outstanding. New York-based Brightwater, meanwhile, managed some $15 billion of structured-product investments in two SIVs, Harrier Funding and Kestrel Funding. Brightwater also issued roughly $10 billion of collateralized debt obligations and operated its own conduit, Greyhawk Funding, which had $9 billion of paper outstanding in the first half of 2007. On the side, WestLB’s U.S. operation wrote so-called subscription lines of credit to managers of private equity funds and real estate investment vehicles.

Most of those businesses are now gone or in run-off mode. Last year, the Compass conduit absorbed what was left of Paradigm Funding. At the end of 2010, Compass had just $290 million of paper outstanding. Of the surviving operations, the subscription-lending business is perhaps the most viable.

Indeed, so little remains of WestLB’s U.S. unit that some industry professionals had been expecting the bank to shut it down altogether. What’s attracting buyers now, apparently, isn’t so much the remaining operations but the assets controlled by those operations. There may also be some interest in picking up the few structured-product professionals who still work for WestLB. The group is led by director Jeffrey Rogoff in New York.

WestLB is owned by the German state of North Rhine-Westphalia, two savings-bank groups and NRW Bank.

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